From Making a Financial Case, Fourth Edition
4 Payback Period
This is probably the most frequently used technique for assessing the financial viability of projects. It regards projects which repay their capital cost most quickly as being best. For example, if a caf purchases a new cooker for 1,000 and makes an average of 0.50 profit on each meal, the cooker will be paid for after 1,000/ 0.50 = 2,000 meals. If the caf sells 40 meals a day, the full price of the cooker is paid back after 2,000/40 = 50 days.
50 days is the payback period.
4.1 Use of the Technique
Try the following Activity to apply the technique of payback period.
Activity 16 
Zo and Hamid decided to set up a carpet cleaning business. They purchased carpet cleaning equipment for 800. On average they expect to earn 5 per carpet after expenses and to be able to clean two carpets a day, five days a week.
_______________________________
Calculate their payback period in weeks.
The payback period is
You will appreciate as a first line manager that the calculations above are rather simplistic. The capital cost of equipment or machinery is fairly easy to work out. It is how much the organization paid for it together with delivery, installation and other costs incurred to get it up and running. But how is income calculated? And you know that income does not always flow in evenly.
4.2 Gathering Information for Analysis
In practice you will have a number of things to think about when making an...
Products & Services
Topics of Interest
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Payback The payback may be defined as the amount of time, usually expressed in years and months, required for the original investment amount to be repaid by the cash-in flows. This measure is...
By Christina Galitsky, Sheng-chieh Chang, Ernst Worrell and Eric Masanet, Berkeley National Laboratory, Environmental Energy Technologies Division When considering whether to rewind a motor or to...
Payback The payback may be defined as the amount of time, usually expressed in years and months, required for the original investment amount to be repaid by the cash-in flows. This measure is...
