Payback Period this term refers to the length of time it takes for the company to recover their initial investment in the project and start to make profit.
Payback period= initial investment/ periodic cash flow
Example: an investment in project will cost $1000,000 and will generate a cash flow of $200,000 per year. what is the payback period for the investment?
Payback period= initial investment/ periodic cash flow
Payback period = $1000,000 / $200,000, or 5 years.
Question: There are two projects: Project X with a payback period of 10 months and project Y with payback period of 15 months. which one should the company choose?
Answer: if the payback period is the selection criteria in the question which is, project X is the favorite choice.
Payback period is not favorable selection criteria comparing to the Return on investment and it is rarely a main consideration when it comes to project selection. An organization may choose longer payback period for an investment that has bunch of other benefits and advantages such as higher return on investment, higher cost-benefit ratio, and etc.
Payback period= initial investment/ periodic cash flow
Example: an investment in project will cost $1000,000 and will generate a cash flow of $200,000 per year. what is the payback period for the investment?
Payback period= initial investment/ periodic cash flow
Payback period = $1000,000 / $200,000, or 5 years.
Question: There are two projects: Project X with a payback period of 10 months and project Y with payback period of 15 months. which one should the company choose?
Answer: if the payback period is the selection criteria in the question which is, project X is the favorite choice.
Payback period is not favorable selection criteria comparing to the Return on investment and it is rarely a main consideration when it comes to project selection. An organization may choose longer payback period for an investment that has bunch of other benefits and advantages such as higher return on investment, higher cost-benefit ratio, and etc.