Payback period definition pdf

Since the machine will last three years, in this case the payback period is less. Simply, it is the method used to calculate the time required to earn back the cost incurred in the investments through the successive cash inflows. Under payback method, an investment project is accepted or rejected on the basis of payback period. Payback method formula, example, explanation, advantages. It gives the number of years it takes to break even from undertaking the initial. Pdf authors developed a mathematical model for estimating the discounted payback period of investments for reducing energy resources. Payback period is the time in which the initial outlay of an investment is expected to be recovered through the cash inflows generated by the. Net present value and payback period for building integrated hrmars. In this context, the payback period pbp is one of the most popular. Simply put, the payback period is the length of time an investment reaches a breakeven point. The following example will demonstrate the absurdity of this statement. The payback period helps to determine the length of time required to recover the initial cash outlay in the project. The lcc analysis of street lighting luminaires uses these two indices.

Payback period rule of capital budgeting are different from the relevant cash flows for the npv rule of capital budgeting. This paper examines the classical definition of the payback period criterion for investment projects, and reformulates this criterion in a way thal frees it from the. The payback rule specifies that a project be accepted if its payback period is less than the specified cutoff period. Payback period means the period of time that a project requires to recover the money invested in it. Pdf payback period of investments in energy saving researchgate. Payback period time until cash flows recover the initial investment of the project. Bhandari 37 states that the present value and payback time net present value and discounted payback period in the original reference are the most comprehensive indices in capital budgeting decision criteria. The tools discussed include the payback period, net present value npv method, the internal rate of return irr method and real options to substantiate the importance of using payback method in making capital budget decisions in relation to other appraisal techniques.

Unlike net present value and internal rate of return method. By definition, the payback period is the amount of time years in which it recovers the initial investment. It is one of the simplest investment appraisal techniques. Payback period payback period is the time in which the initial outlay of an investment is expected to be recovered through the cash inflows generated by the investment. 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. The payback period as a measure of profitability and liquidity.

Payback method payback period formula accountingtools. South american journal of management volume 1, issue 2, 2015 the importance of payback method in capital budgeting decisions article by jones stamalevi. A strategic framework to use payback period in evaluating the. The payback period refers to the amount of time it takes to recover the cost of an investment. Table 6 indicated the definition of each variable in the equation. The discounted payback period is a capital budgeting procedure used to determine the profitability of a project. Pdf the importance of payback method in capital budgeting. The purpose of this paper is to show that for a given capital budgeting project the cash flows to which the payback period rule is. The payback period is the length of time required to recover the cost of an investment. Obtained equations allow calculating the projected payback period for investments in energy saving, taking into account the size of the investment, the estimated or actual value of the achieved.