Example of Simple Payback Period
ABC company has a started a project with initial investment
of $ 500. The project is expected to generate the following cash flows.
Calculate the payback period.
|
0
|
(500)
|
|
1
|
250
|
|
2
|
250
|
|
3
|
250
|
Solution
|
Years
|
Recovered/Paid
back
|
Cumulative
|
|
0
|
|
(500)
|
|
1
|
250
|
250
|
|
2
|
250
|
0
|
|
3
|
250
|
|
Payback period is 2 years because the investment recovered in
two years. It is to be noted that cash flow after recovery of initial
investment are not relevant and must be ignored.
