Annuity Payback Period Example
Mr. Shahid wants
to start a new business with initial investment of $ 1400. Mr. Shahid is
expecting a constant cash inflow per year i.e. $ 300. Calculate the payback
period.
|
Initial Investment
|
$ 1400
|
|
Cash flow ( 10 Years)
|
$ 300
|
Solution
Formula for payback period for
annuity
= Initial investment / Cash inflow (during years)
= $ 1400/$300
=4.66 Years i.e 4 years & 8 months
Alternate Methods
|
Years
|
Recovery during the year
|
Cumulative
|
|
Initial Investment
|
($ 1400)
|
$ 1400
|
|
Year 1
|
$ 300
|
$ 1100
|
|
Year 2
|
$300
|
$ 800
|
|
Year 3
|
$ 300
|
$500
|
|
Year 4
|
$300
|
$200
|
|
Year 5
|
$300
|
($ 100)
|
1. 4 years
2. =200/300 = .66 months (divide year 4
cumulative balance by amount to be recovered in year 5)
3. 4 years + .66 months
Comments on Example
1. Formula provides a quick way of
calculating payback period
