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Remmy, Australia
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Calculation of Pay back period
How do we calculate payback period when the returns / cashflows are different each year?
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Jaap de Jonge
Editor, Netherlands
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Payback Period if annual cashflows vary?
In case the annual cashflows are not the same, the formula is still valid.
Suppose the same project is costing $200.000, but now the annual cashflows are: $30.000 (yr 1), $40.000 (yr 2), $50.000 (yr 3), $40.000 (yr 4), $20.000 (yr 5), $20.000 (yr 6), and $50.000 (yr 7).
After 6 years the total of all cash inflows equals the costs (investments) in the project. Therefore the Payback Period of our project is 6 years.
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Ade Osunsanmi, UK
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Pay back Period
I think the the pay back period is just a cumulative sum of money to PAY BACK the initial investment . If your cash flows in the example you gave are "cash inflows" then the pay back period" occur in the second year since by the end of second year you would have had $18,000 enough to pay $15,000. I hope this helps?
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Asher Alas
Accountant, Philippines
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Sample Payback Period Computation with Different Annual Cashflow
Payback period refers to the period of time required for the return on an investment to repay the sum of the original investment.
In computing the payback period, the cash flow statement is very useful. Below is the computation of payback period.
Total investment: 713,389.25
Year 1: 358,200.00
Year 2: 407,180.60
Year 3: 398,913.40
Year 4: 326,071.35
Year 5: 180,563.17
After year 1, there is 713,389.25 - 358,200.00 = 355,189.25 to be recovered.
The cash flow in year 2 is bigger than what needs to be recovered.
So, the payback period = 1 + a fraction of year 2
The fraction is calculated as folows: fraction = balance to be recovered in year 2 / annual cash inflow in year 2
= 355,189.25 / 407,180.60 = 0.8723
Therefore: payback period = 1.8723 years
Based on the computation presented above, the proposed project with a total investment of php 713,389.25 shall be recovered in 1.87 years.
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Azzam Ali
Analyst, Saudi Arabia
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Many Terms
I observe that there are many methods calculating pp, and I wonder which one is the accurate one. Also sometimes we use many different terms ( net profit, cash inflow, net cash )... Accordingly should we use income statement or cash flow figures in the calculation? Thanks.
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Mukela Namushi Mubano, Zambia
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Payback Period
I do not think the formula dictates that the cash flows should be the same. Sometimes they may not be. The payback period is the period it takes for one to recoup one's investment. Times are not the same. Sometimes one does well. Sometimes not.
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Gabriel Hogan, Ireland
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Payback period
Payback period is a great method but if you are considering investments in innovation it has its drawbacks, namely it does not account for the cost (loss of competitive advantage) of doing nothing. See the Innovation Killers article in Harvard Business Review Jan 2008 by Christensen, Kaufman and Shih
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Herson Deleon, Philippines
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Calculating payback period
Yes, it is difficult if the annual income of a certain company is not always constant. Obviously you will use a lot of operation just to get the accurate answer, which is really necessary to business.
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Peter Hansen, Neverland
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Good resource
I found that this was a very useful website with relevant explanations and examples. Keep up the good work!
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Tichakunda Gumbo, Zimbabwe
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Comment on payback period Tecnique
Your payback period calculation formular is somehow too generalised in that it assumes that all projects will have equal annual cashflows.What about those with different annual cashflows.?
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Vishwa, India
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Payback period calculation for Uneven cashflow over the years
Say my initial investment is $15,000 and my subsequent annual cash flows are 1) $11000, 2) $7000 and 3) $4800
Now how do you calculate the cash flow. I am not sure if the cash flows have to be considered with an weighted agerage or should I looke at monthly averages or weekly or daily averages for that year to arrive at a losest figure?
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