Payback Period (PP) Method & Definition – IBusinessMotivation

Payback Period (PP) Method & Definition - IBusinessMotivation

What is the payback period method?

Hello, This method is popularly known as the pay-off, pay-out, reconnaissance method. This payback period refers to the time it takes to recover the cost of an investment. Simply put, the payback period is the period to reach the investment. This gives the number of those years. In which it pays back the total investment in any particular capital expenditure. And this method is based on the principle that it pays back all capital expenditure over several years.

Simply put, it generates income within a certain period of time. When the total income “or net cash flow” from the investment is equal to the total outlay, that period is the repayment period of the capital investment. Which is then adopted by an investment project. Until he pays for himself within the specified period. Such as 5 years or less.

This recurrence period is decided by the management after taking into consideration several things. That, while a comparison is made between two or more projects, the lower the number of payback years, the more the project will be acceptable. And this formula of calculating the payback period is highlighted in a simple way. As before, net-cash-inflow is determined. And then we divide the initial cost (or any value we want to recover) by the annual cash flow. And this is the resulting quotient payback period. Like the following sources are described below.

Original Investment

Payback period = ———————————–

Annual Cash-inflows

If the annual cash-flow is unequal, based on the stated sources, the calculation of the payback period takes a cumulative form. And we accumulate the annual cash-flow until the investment is realized, then as soon as this amount is recovered, it is the expected number of years of return. Which is an asset or capital expenditure outlay that pays itself back to the initial comparison, which is to be preferred?

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