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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
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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.
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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
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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}})}
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of a project equal the amount of energy expended since project inception); these other terms may not be standardized or widely used.
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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
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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.
397:"The Energy Return on Energy Investment (EROI) of Photovoltaics: Methodology and Comparisons with Fossil Fuel Life Cycles"
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Although primarily a financial term, the concept of a payback period is occasionally extended to other uses, such as
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289:= The number of years after the initial investment at which the last negative value of cumulative cash flow occurs.
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To calculate a more exact payback period: Payback Period = Amount to be
Invested/Estimated Annual Net Cash Flow.
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90:{\displaystyle {\text{Net Cash Flow Year 1}}={\text{Cash Inflow Year 1}}-{\text{Cash Outflow Year 1}}}
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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
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173:. Payback period intuitively measures how long something takes to "pay for itself."
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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.
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317:The sum of all of the cash outflows is calculated.
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272:Payback Period = (p - n)÷p + n
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165:Description
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