How to calculate payback period?

A Payback Period is a period or the number of years require to recover the value of the investments. That have been issue. It may calculate the payback period with simple method. The investors or Entrepreneurs often use the Payback Period (PP) or repayment period this capital as decisive in taking investment decisions, namely the decisions that determine whether the capital will invest into a project or not. A project that returns are very long period is certainly less attractive for most investors.

The sense of the Payback Period according to experts

 The sense of the Payback Period is the period that is necessary to close back spending investment (initial cash investment). Base on the definition the Payback Period is a period of return of the investment that has been issue, through profits gain from a project that has been plan. Meanwhile, Payback period is a period that is require to be able to close the back of investment spending using cash flow or net proceeds (net cash flows).

How to Calculate Payback Period?

Payback Period or Payback Period can be calculate by way of share value of investment (cost of investment) with a net cash flow of incoming per year (annual net cash flow).

The Formula of the Payback Period

The following is the formula of the Payback Period (PP):

Payback Period of Investment = Value/Cash Net Entry

Note: this formula assumes that the magnitude of the incoming cash NET is the same in each period or the same in each year.

Example case calculation of the Payback Period

The management of organization is considering the purchase of electronic component production machine. By purchasing valuable production Machine $ 250 million, profits or net income derive from the addition of these machines is $ 70 million per year.

What is the Payback Period for this production?

The completion of:

Note:

Investment value = $ 250 million.
Net Incoming Cash = $70 million.
= Payback Period?



The investment payback Period = value/Cash Entered the NET
Payback Period = USD 70 million.
Payback Period = 3.57

So the payback Period or payback period for the production of the machine was for 3.57 years.