Payback period

shelle

Hi could anyone please tell me how to worked out the pay back period once i have worked out the net present value i know how to do this bit but when home poorly so missed the rest and my tutor is not exactly helping just stressin at everone i dont really want to ask :sad:

would be greatful for any response

cheers

Richard

It is the time taken to recover the costs of an asset. If you have a capital expense of £30,000, and your net cash flow was £10,000 per year the payback period would be exactly three years.

Year 0 = 0 income (30,000)

Year 1 = 10,000 income (20,000)

Year 2 = 10,000 income (10,000)

Year 3 = 10,000 income 0 - so the expense has been recovered


Year 0 = 0 income (30,000)

Year 1 = 12,000 (18,000)

Year 2 = 12,000 (6,000)
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payback period will be inbetween yrs 2 & 3
Year 3 = 12,000 6,000

At the end of year 3 we have recovered an extra 6,000 - so the payback period will be between year 2 and year 3. Assuming net income is 1,000 per month we can tell that it was paid 6 months into year 2, so your payback period will be 2 yrs 6 months.