payback period

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Payback period

In project evaluation and capital budgeting, the payback period estimates the time required to recover the principal amount of an investment.  Because the payback period method ignores any benefits that occur after the investment is repaid and the time value of money, other methods of investment analysis are often preferred. See: Internal rate of return (IRR), Discounted cash flow (DCF), and Net present value (NPV)

Payback Period

The time between the first payment on a loan and its maturity. For example, if one takes out a student loan with a payback period of 10 years, the full amount of the loan is due 10 years after the first payment, which occurs on an agreed-upon date. Over the course of the payback period, a borrower must either pay back the loan with his/her own funds or take out a different loan to pay off the first. It is also called the premium recovery period. See also: Refinancing.

payback period

1. The length of time needed for an investment's net cash receipts to cover completely the initial outlay expended in acquiring the investment.
2. The number of years the higher interest income from a convertible bond (compared with the dividend income from an equivalent investment in the underlying common stock) must persist to make up for the amount above conversion value paid for the convertible. Also called premium recovery period.

payback period

a criterion used in INVESTMENT APPRAISAL to evaluate the desirability of an INVESTMENT project. Payback calculations involve measuring the CASH FLOWS associated with a project and indicate how long it takes for an investment to generate sufficient cash to recover in full its original capital outlay. For example, if a machine costs £5,000 to purchase at the start of year 1, then generates net cash inflows from the sale of products made by the machine of £5,000 in year 1 and £3,000 in year 2 then it would recoup the initial cash outlay in the first year. If a firm's target payback period for new investment projects was, say, two years or less, then this particular project would be undertaken.

Whether or not the machine pays back its initial outlay in one year depends upon how accurate the future estimates of sales volumes, selling prices, materials costs etc. turn out to be. Since all investments involve assessments of future re-venues and costs they are all subject to a degree of uncertainty. This problem, in part, can be handled by undertaking sensitivity analysis, by making not one but three estimates for each item of project cost or revenue (‘optimistic’, ‘most likely’, ‘pessimistic’) to indicate the range of possible outcomes.

payback period


payback method

the period it takes for an INVESTMENT to generate sufficient cash to recover in full its original capital outlay. For example, a machine that cost £1,000 and generated a net cash inflow of £250 per year would have a payback period of four years. See also DISCOUNTED CASH FLOW, INVESTMENT APPRAISAL.

payback period

An estimate of the time that will be necessary for an investor to recoup the initial investment.It is used to compare investments that might have different initial capital requirements.

References in periodicals archive ?
Payback periods were investigated for different operation hours and electricity prices.
The annual energy savings (PAS) when the old split unit is replaced by the new one was calculated as well as the simple payback period (SPR).
With a shorter payback period, there's less of a chance that market conditions, interest rates, the economy or other factors will drastically change.
The payable method ignores any benefits that occur after the payback period, so a project that returns $100,000 after a three year payback period is ranked lower than a project that returns zero after a two year period.
The GreenSmart approach to energy reduction focuses on installing or repairing passive, more cost-effective energy reduction and weatherization measures in residents' units that result in immediate energy savings with less investment and a shorter payback period.
The effect of these reductions for the satcom user translates into shorter payback periods.
Despite my preference for discounted cash flow, doesn't the heavy use of payback period by Japanese firms argue for its validity in the U.
Customers See 600 Percent ROI, Payback Period of 156 Days
The end result is an increase in network capacity, throughput and speed of 100 to 400+ percent, which ultimately translates to average payback periods of 3 - 12 months.
This growth strategy will continue in the future, and will be accelerated as payback periods are expected to continue to decline as a result of falling subscriber acquisition costs and increasing installation and subscription based revenues.
Network capacity, throughput and speed increase by an average of 100 to 400 percent, which translates to average payback periods between 6 and 12 months.
Compared to alternative solutions, Tatara's approach can shorten the payback period for public Wi-Fi networks by more than 18 months.