Payback period is defined as the length of time essential to recover the cost of an investment. The payback period of a given venture or project is an important determinant of whether a business should take up the said position or project. The longer a payback period is, the less desirable it becomes an investment option.
In investment payback analysis, if all other variables are kept equal, companies prefer to invest more with the one with the shorter payback period. The reason for this is that payback period technique ignores any advantages that could have occurred after the payback period and, therefore, do not measure cost-effectiveness.It also overlooks the time value of money, which is another important asset of many businesses.
Investment payback analysis, in short:
- Allows a more secure means of analyzing payback periods as compared to other methods of capital budgeting.
- Helps analyze the period of time required to earn the funds consumed in an investment, or to reach the break-even point.
- Automatically measures how long it will take a company to pay off any debts and how much revenue the company will generate from a particular investment.
- Compares the effectiveness of shorter payback periods to longer payback periods.
The Payback Period is the length of time between an initial investment and the recovery of the investment from its annual cash flow. It is important that you complete 10 years. Investment payback analysis template can assist you with your projections. Shorter payback periods are preferred to longer payback periods.
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