Payback method is a method of appraising an investment in which an investment project is accepted or rejected on the basis of the payback period. The payback period is the time that a project takes to recover the initial investment of a project. The investment managers can set a benchmark payback period for acceptance or rejection.
For example, a company has a policy of accepting investment projects with a payback period of three years or less.
|
Period |
Project A |
Project B |
Project C |
|
0 |
-25000 |
-40000 |
-65000 |
|
1 |
10000 |
15000 |
20000 |
|
2 |
10000 |
15000 |
20000 |
|
3 |
10000 |
15000 |
20000 |
|
4 |
10000 |
15000 |
20000 |
|
5 |
10000 |
15000 |
20000 |
|
6 |
10000 |
15000 |
20000 |
|
7 |
10000 |
15000 |
20000 |
|
|
|
|
|
|
Payback Period |
2.5 years |
2.67 years |
3.25 years |
Both projects A and B are acceptable as they are offering a payback period of less than three years.
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A number of terms are listed below: /
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