Formula for Investment Payback Analysis

[Inder]

How to calculate Investment Payback (period) ?
What is the formula ?

[Cornelius Fichtner, PMP]

Hi Inder,

The “Payback Period” or refers to the period of time required for the
return on an investment to "repay" the sum of the original investment.
Whenever you invest in a business you expect the business to pay you
back in future in smaller pieces over time. You need to track from the
day you invested in the project till the point in time when the total
of the revenue to date crosses the invested amount. Most of the time
it is calculated manually.

Since, in practical life, the project revenue (or cash flows) never
come in equal installments or amounts, the formula for calculating the
payback period cannot be developed other than manually adding up all
the cash flows to the point when they cross the investment. However if
we assume that we are receiving an equal amount (same installment) on
a fixed periodic basis, a formula can be developed. Assuming that we
have an initial investment of “x” dollars, and we are expecting a
fixed amount “y” dollars per fixed time periods “t”. Then the payback
period will be:

Payback period = x/y (time period units)

Suppose I invest $10,000 in a business and expect to get a return of
$2,000 by the end of every year. I can use the above formula to
calculate my payback period since I have a fixed time period, i.e, 1
year, and I have a fixed return amount, i.e. $2,000.

Payback period = 10,000/2,000 = 5 years.

However, please note that, in practical life, the cash flows are NEVER
in equal installments and fixed time periods. You need to calculate
the payback period manually.

I hope this answers the question.

Regards,

Exam Support Team
The PM PrepCast - http://www.premiumcast.com/vp/50398/16780/10387/

[krishnamurthy mahankali]

its basically called break even point or period. I.e you have got the investment you made as returns in  a certain period of time. This period is called Pay back period. This is not profit. It is that after this time period what ever you earn will be your profit after deducting you expenses if any.

On Tue, Sep 7, 2010 at 8:03 AM, Inder <ikch...@gmail.com> wrote:

How to calculate Investment Payback (period) ?
What is the formula ?

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