Knowledge (XXG)

Payback period

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Payback period is often used as an analysis tool because it is easy to apply and easy to understand for most individuals, regardless of academic training or field of endeavor. When used carefully or to compare similar investments, it can be quite useful. As a stand-alone tool to compare an investment
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Payback period is usually expressed in years. Start by calculating Net Cash Flow for each year: Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1. Then Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3, etc.) Accumulate by year until Cumulative
157: 95: 253:. An implicit assumption in the use of payback period is that returns to the investment continue after the payback period. Payback period does not specify any required comparison to other investments or even to not making an investment. 344:
have a long life span and continue to provide cash flows even after the payback period. Since the payback period focuses on short term profitability, a valuable project may be overlooked if the payback period is the only consideration.
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drops to a negative value some time after it has reached a positive value, thereby changing the payback period, this formula can't be applied. This formula ignores values that arise after the payback period has been reached.
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Payback period doesn't take into consideration the time value of money and therefore may not present the true picture when it comes to evaluating cash flows of a project. This issue is addressed by using
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Additional complexity arises when the cash flow changes sign several times; i.e., it contains outflows in the midst or at the end of the project lifetime. The modified payback period
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light bulb may be described as having a payback period of a certain number of years or operating hours, assuming certain costs. Here, the return to the investment consists of reduced
177:, shorter payback periods are preferable to longer payback periods. Payback period is popular due to its ease of use despite the recognized limitations described below. See 62: 458: 374: 407: 301:
can only be used to calculate the soonest payback period; that is, the first period after which the investment has paid for itself. If the cumulative
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The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the
152:{\displaystyle {\text{Cumulative Cash Flow}}=({\text{Net Cash Flow Year 1}}+{\text{Net Cash Flow Year 2}}+\ldots +{\text{Net Cash Flow Year n}})} 435: 199: 206:
of a project equal the amount of energy expended since project inception); these other terms may not be standardized or widely used.
370: 49:$ 500 at the end of year 1 and year 2 respectively would have a two-year payback period. Payback period is usually expressed in 323:
The modified payback is calculated as the moment in which the cumulative positive cash flow exceeds the total cash outflow.
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cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation.
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Although primarily a financial term, the concept of a payback period is occasionally extended to other uses, such as
513: 503: 289:= The number of years after the initial investment at which the last negative value of cumulative cash flow occurs. 334: 396: 265:
To calculate a more exact payback period: Payback Period = Amount to be Invested/Estimated Annual Net Cash Flow.
425: 250: 39: 90:{\displaystyle {\text{Net Cash Flow Year 1}}={\text{Cash Inflow Year 1}}-{\text{Cash Outflow Year 1}}} 291:
n= The value of cumulative cash flow at which the last negative value of cumulative cash flow occurs.
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Accumulate by year until Cumulative Cash Flow is a positive number: that year is the payback year.
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p= The value of cash flow at which the first positive value of cumulative cash flow occurs.
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endorses the definitions, purposes, and constructs of classes of measures that appear in
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The term is also widely used in other types of investment areas, often with respect to
178: 497: 173:. Payback period intuitively measures how long something takes to "pay for itself." 361:
Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010).
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Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.
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Payback also ignores the cash flows beyond the payback period. Most major
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technologies, maintenance, upgrades, or other changes. For example, a
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Ibon Galarraga, M. González-Eguino, Anil Markandya (1 January 2011).
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Marco Raugei; Pere Fullana-i-Palmer; Vasilis Fthenakis (March 2012).
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For example, a $ 1000 investment made at the start of year 1 which
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The cumulative positive cash flows are determined for each period.
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to "doing nothing," payback period has no explicit criteria for
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Cash Flow is a positive number: that year is the payback year.
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Alternative measures of "return" preferred by economists are
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https://www.calculator.net/payback-period-calculator.html
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Common Language: Marketing Activities and Metrics Project
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Upper Saddle River, New Jersey: Pearson Education, Inc.
107: 65: 317:The sum of all of the cash outflows is calculated. 151: 89: 234:, or other important considerations, such as the 375:Marketing Accountability Standards Board (MASB) 53:. Starting from investment year by calculating 269:It can also be calculated using the formula: 8: 457:: CS1 maint: multiple names: authors list ( 141: 127: 119: 108: 106: 82: 74: 66: 64: 430:. Edward Elgar Publishing. p. 37. 354: 450: 337:, which uses discounted cash flows. 7: 473:Financial and Managerial Accounting, 202:(the period of time over which the 413:from the original on 8 March 2016. 14: 272:Payback Period = (p - n)÷p + n 169:Payback does not allow for the 26:refers to the time required to 427:Handbook of Sustainable Energy 146: 116: 1: 475:McGraw-Hill, 2012, p. 1117. 530: 471:Williams, J. R., et al., 447:– via Google Books. 381:as part of its ongoing 251:internal rate of return 280:- n÷p (unit:years) 153: 91: 313:may be applied then. 200:energy payback period 154: 92: 342:capital expenditures 175:All else being equal 143:Net Cash Flow Year n 129:Net Cash Flow Year 2 121:Net Cash Flow Year 1 110:Cumulative Cash Flow 105: 68:Net Cash Flow Year 1 63: 224:time value of money 190:compact fluorescent 171:time value of money 84:Cash Outflow Year 1 149: 87: 76:Cash Inflow Year 1 38:, or to reach the 514:Capital budgeting 504:Corporate finance 379:Marketing Metrics 247:net present value 186:energy efficiency 144: 130: 122: 111: 85: 77: 69: 24:capital budgeting 521: 476: 469: 463: 462: 456: 448: 446: 444: 421: 415: 414: 412: 401: 392: 386: 359: 240:weighted average 236:opportunity cost 194:operating costs. 158: 156: 155: 150: 145: 142: 131: 128: 123: 120: 112: 109: 96: 94: 93: 88: 86: 83: 78: 75: 70: 67: 57:for each year: 40:break-even point 529: 528: 524: 523: 522: 520: 519: 518: 494: 493: 485: 480: 479: 470: 466: 449: 442: 440: 438: 423: 422: 418: 410: 399: 394: 393: 389: 360: 356: 351: 330: 294: 292: 290: 288: 284: 281: 279: 275: 266: 259: 217:decision-making 212: 167: 103: 102: 61: 60: 34:expended in an 17: 16:Accounting term 12: 11: 5: 527: 525: 517: 516: 511: 506: 496: 495: 492: 491: 484: 483:External links 481: 478: 477: 464: 437:978-0857936387 436: 416: 387: 353: 352: 350: 347: 329: 326: 325: 324: 321: 318: 286: 277: 273: 271: 258: 255: 211: 208: 204:energy savings 179:Cut off period 166: 163: 148: 140: 137: 134: 126: 118: 115: 81: 73: 20:Payback period 15: 13: 10: 9: 6: 4: 3: 2: 526: 515: 512: 510: 507: 505: 502: 501: 499: 490: 487: 486: 482: 474: 468: 465: 460: 454: 439: 433: 429: 428: 420: 417: 409: 405: 398: 391: 388: 384: 380: 376: 372: 371:0-13-705829-2 368: 364: 358: 355: 348: 346: 343: 338: 336: 327: 322: 319: 316: 315: 314: 312: 307: 304: 300: 295: 270: 267: 263: 256: 254: 252: 248: 243: 241: 237: 233: 229: 225: 220: 218: 209: 207: 205: 201: 196: 195: 191: 187: 182: 180: 176: 172: 164: 162: 159: 138: 135: 132: 124: 113: 100: 97: 79: 71: 58: 56: 55:Net Cash Flow 52: 48: 43: 41: 37: 33: 29: 25: 21: 472: 467: 441:. Retrieved 426: 419: 403: 390: 378: 362: 357: 339: 331: 328:Shortcomings 308: 296: 282: 268: 264: 260: 257:Construction 244: 221: 213: 197: 183: 168: 160: 101: 98: 59: 44: 19: 18: 165:Description 509:Investment 498:Categories 349:References 36:investment 453:cite book 311:algorithm 303:cash flow 232:financing 136:… 80:− 408:Archived 47:returned 404:bnl.gov 299:formula 276:= 1 + n 210:Purpose 99:Then: 434:  373:. The 369:  28:recoup 443:9 May 411:(PDF) 400:(PDF) 297:This 283:Where 51:years 42:. 32:funds 459:link 445:2017 432:ISBN 367:ISBN 249:and 228:risk 30:the 335:DPP 22:in 500:: 455:}} 451:{{ 406:. 402:. 230:, 226:, 181:. 461:) 385:. 287:y 285:n 278:y 274:y 147:) 139:+ 133:+ 125:+ 117:( 114:= 72:=

Index

capital budgeting
recoup
funds
investment
break-even point
returned
years
Net Cash Flow
time value of money
All else being equal
Cut off period
energy efficiency
compact fluorescent
operating costs.
energy payback period
energy savings
decision-making
time value of money
risk
financing
opportunity cost
weighted average
net present value
internal rate of return
formula
cash flow
algorithm
DPP
capital expenditures
ISBN

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