## 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...

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