Question 1

What is payback period and why is it important?

Accepted Answer

Payback period is the time it takes for an investment to recover its initial cost through cash flows. It's important because it shows investment risk and liquidity - shorter payback periods mean faster recovery and lower risk. It's a simple way to evaluate investment feasibility.

Question 2

What's the difference between simple and discounted payback period?

Accepted Answer

Simple payback doesn't account for time value of money - it treats all cash flows equally. Discounted payback accounts for the time value of money by discounting future cash flows, providing a more accurate and conservative estimate. Use discounted payback for better analysis.

Question 3

How do I calculate payback period with varying cash flows?

Accepted Answer

Use 'Multiple Cash Flows' mode. Enter the initial investment, then add cash flows for each year. The calculator finds the point where cumulative cash flows equal the initial investment. This handles real-world scenarios where cash flows vary over time.

Question 4

What is a good payback period?

Accepted Answer

A good payback period depends on your risk tolerance and industry standards. Generally, shorter is better. Many businesses prefer payback periods under 3-5 years. However, consider other factors like total return, risk, and strategic value when evaluating investments.

Question 5

Can payback period be longer than the investment term?

Accepted Answer

Yes, if cumulative cash flows never reach the initial investment amount, the payback period is longer than the investment term or may never occur. This indicates the investment may not be profitable. Consider other metrics like NPV or IRR for such cases.

Payback Period Calculator - Investment Payback Analysis & Cash Flow

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