Payback Period Concept

Payback period represents the time it takes to recover the invested amounts through cash-flows generated by that same investment (a lot used with one of the key indicators in viability analysis studies). By other words, represents the time needed so that the Net Present Value (NPV) reaches positive values. To update future cash-flows is used a rate to which is called discount rate. This discount rate isn’t more than an interest rate without risk (usually are used OT’s interest rates) added an established risk prize for the type of projects at stake.

Due to the easiness of comprehension, the investment recovery term is one of the preferred indicators by the businessmen.

Calculation formula:

CFi = Cash-flow in the year i
t = Discount rate
n = Payback period

Being this equation of difficult mathematic calculation (its resolution is only possible by successive approaches) are usually used computer means.

 

 

 

Translated from Portuguese by Susana Saraiva, Portuguese-English and English-Portuguese translation specialist. Contact: spams@sapo.pt.