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Payback Period Formula Examples and Calculations
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In this video on Payback Period, we discuss What Payback period is?, its formula along with practical examples and calculations. • ๐๐ก๐๐ญ ๐ข๐ฌ ๐๐๐ฒ๐๐๐๐ค ๐๐๐ซ๐ข๐จ๐? • ------------------------------------------ • The length of the time period required for cumulative total net cash flows to total initial cash outlays is called as an Payback period. • In other words, we can say, the investor has recovered the money invested in the project. • ๐๐๐ฒ๐๐๐๐ค ๐๐๐ซ๐ข๐จ๐ ๐ ๐จ๐ซ๐ฆ๐ฎ๐ฅ๐ • ------------------------------------------- • Payback Period Formula = Total Initial Capital Investment/Expected annual after-tax cash inflow • ๐๐ญ๐๐ฉ๐ฌ ๐ญ๐จ ๐๐๐ฅ๐๐ฎ๐ฅ๐๐ญ๐ ๐๐๐ฒ๐๐๐๐ค ๐๐๐ซ๐ข๐จ๐ • -------------------------------------------------------------- • 1. First, you need to determine the initial capital. • 2. Then you need to calculate the annual expected after-tax net cash flows over the useful life of investment. • ๐๐๐ฒ๐๐๐๐ค ๐๐๐ซ๐ข๐จ๐ ๐๐ฑ๐๐ฆ๐ฉ๐ฅ๐ • ----------------------------------------------- • A project costs $3Mn and yields a profit of $40,000 after depreciation of 10% (straight line) but before tax of 20%. Lets us calculate the pay back period of the project. • Profit before tax $ 40,000 • Less: Tax@20%(30000*20%) $ 8,000 • Profit after tax $ 32,000 • Add: Depreciation(2Mn*10%) $ 2,00,000 • Total cash inflow $ 2,32000 • Generally depreciation is added back while calculating cash inflow as it does not result into cash out flow. • Payback Period Formula = Total initial capital investment /Expected annual after-tax cash inflow • = $ 20,00,000/$2,32000 = 8 Years(Approx) • To know more, you can visit: https://www.wallstreetmojo.com/paybac... • Subscribe to our channel to get new updated videos.Click the button above to subscribe or click on link below to subscribe - / @wallstreetmojo
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