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Payback Period
Written by Kenny Foo   
Thursday, 12 March 2009 13:54

Investment Formula Description

Payback period is the total duration or length of time that is required to recover the total cost of investment.

 This investment formula is used to calculate the duration of time to earn back the amount the investors invested into an investment. The shorter the duration to earn back the cost of investment is better. Payback period is a method of analysis with limitations because it does not properly account for the time value of money, risk , financing or other important considerations. Hence, payback period should not be used alone and need to use together with other investment formula such as profit margin, earning per share ( EPS ) and more. Besides ignoring time value of money, payback period does not take into account the profit after the payback period. It is just a simple investment formula for investors to find out how long do the investors need to get back their original investment cost.

 

Investment Formula

Payback Period = Cost of investment / Earnings per year

 

Investment Formula Examples

Charles invested  $100,000 into a corporation ABC and  corporation ABC can generate $20,000 of earnings. The payback period calculation is as following.

Payback Period = Cost of investment / Earnings per year = 100,000 / 20,000 =  5 years

Charles will need to take 5 years to earn back the total amount invested into corporation ABC.



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Last Updated ( Tuesday, 17 March 2009 14:52 )
 
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