What is payback period?

Answer: Payback period is the number of years required to recover the cost of project or initial cash out flows. Say a project requires an initial investment of $10,000 and you can expect cash inflows at the end of each of the next four years in amounts of $5,000 $4,000 $3,000 and $1,000 N---- CF ----------- Cumulative Cash Flow 0---- -10,000(p) 1---- 5,000 -------- 5,000 2q-- 4,000 -------- 9,000 r 3---- 3,000s ------ 12,000 4---- 1,000 -------- 13,000 As we notice that year before recovery is 2. And to get the remaining months out of Year 3, we do the following calculations (10,000 - 9,000)/3000 1,000/3,000 0.333 years 0.333 x 12 months 4 months Thus regular payback period is 2 years and 4 months

The Meaning of Payback Period

Payback Period is a financial metric that answer the question: How long does it take for an investment to pay for itself? Or, how long does it take for incoming returns to cover costs? Or, put still another way: How long does it take for the investment to break even? Like other financial metrics such as internal rate of return (IRR) and return on investment (ROI), payback period takes essentially an "Investment" view of the action, plan, or scenario and its estimated cash flow stream. Each of these metrics comparies investment costs to investment returns in one way or another. Payback period is the length of time required for cumulative incoming returns to equal the cumulative costs of an investment (e.g. purchase of computer software or hardware, training expenses, or new product development), usually measured in years. Other things being equal, the investment with the shorter payback period is considered the better investment. The shorter payback period is preferred because:

The investment costs are recovered sooner and are available again for further use. A shorter payback period is viewed as less risky. It is usually assumed that the longer the payback period, the more uncertain are the positive returns. For this reason, payback period is often used as a measure of risk, or a risk-related criterion that must be met before funds are spent. A company might decide, for instance, to undertake no major investments or expenditures that have a payback period over, say, 3 years

A project costs rs 20,00,000 and yield annually the profit of rs 3,00,000 after depriciation @ 12.5 % (stright line mathods) but befout tax 50% calculate tha cash inflow from the project pay back period