BOOK_CONTENT
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...

Copyright ILM 2003 under license agreement with Books24x7

Products & Services
Building Cleaning and Maintenance Services
Building cleaning and building maintenance services provide and perform building or facility cleaning and maintenance or repair on a daily, weekly, or ad hoc basis.
Legal Services
Legal services consist of lawyers, law firms, and providers of services related to intellectual property (e.g., patenting, licensing, and trademarking), incorporation, contract development, law suits, and other legal matters.
Dissolved Oxygen Meters
Dissolved oxygen meters are analytical instruments that are used to measure the amount of oxygen dissolved in a liquid sample.
Real Estate Sales, Leasing, and Rental Services
Real Estate Sales, Leasing, and Rental Services involves the sales or rental of space to perform a business activity. Commercial, industrial and office space typically falls under these transactions. Sales involves transfer of title/ownership of the build
Satellites
Satellites are manmade objects placed in orbit above the Earth for a variety of civil, scientific, and military applications, such as communications, environmental monitoring, navigation, and reconnaissance.

Topics of Interest

5 Return on Investment Return on investment, which you may also hear called accounting rate of return is a financial appraisal technique which tackles the problem that payback takes no account of...

7 Summary The total cost of projects usually comprises committed and discretionary costs. Committed costs are required by legislation and industry standards and cannot usually be avoided.

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...