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A replacement computer will cost you $3,500.00, but save you $750.00 each year because of the faster processor. What is the payback period of the computer: 4.67.
How do we determine the payback period?
- In simple terms, the payback period is calculated by dividing the cost of the investment by the annual cash flow until the cumulative cash flow becomes positive, indicating the payback year.
- It is the number of years required to recoup a project's initial investment. To begin, put the initial investment into a cell (e.g., A3). Then, enter the annual cash flow into another spreadsheet (e.g., A4).
- Enter the following formula in an empty cell to calculate the payback period: "=A3/A4" because the payback period is calculated by dividing the initial investment by the annual cash inflow.
- The payback period disregards the time value of money and is determined by counting the number of years it takes to recover the funds invested.
- The payback period is five years, for example, if it takes five years to recover the cost of an investment. This period does not take into account what happens after payback.
To learn more about payback period refer to
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