In any project in which the characteristic of “Profitable” is expected, the recovery of the investment is assumed as a premise, so the time it takes to recover the money invested or the “Payback Period” becomes very important, since How profitable it is, and how risky it will be to carry it out will depend on it. The shorter the payback period, the less risky the project will be. For this reason special mention should be made, the more one goes into the future, the greater the uncertainties.
If you want to use the Recovery Period or Payback Period, as a benchmark in decision-making, to evaluate projects, you have two types:
- Independent projects.- If they have a recovery period of less than a certain period, then those that comply should be accepted. Mutually exclusive projects.- The one with the fastest return will be chosen.
Payback calculation:
1. Establish the accumulated flow.
Establish the accumulated flow.
Note that the last negative value is in the 2nd. Period.
2. Use the following equation:
Payback calculation
In Excel it would be:
Payback calculation
Advantage
- It's easy to Calculate A short payback period (short Payback) sets up a quick return on investment, a very useful practice for start-up companies or small companies. With a short Payback Period, the risk of loss is reduced, by ensure positive flow. A short Payback Period will improve liquidity quickly.
Disadvantages
- This method does not take into account the value of money over time, it only measures how long it takes to recover the investment, if it is used in the comparison of various cash flows, no importance is given to the useful life of the assets, nor is the cash flow after the return period.
Bibliography
L. Blank, & A. Tarquin; Economic engineering. Ed. McGrawHill, Mexico, 6th Edition, 2006.
Link:
Payback - Recovery Period
2-2-2015;
