Ideal Payback Period

Ideal Payback Period

What payback period is good depends on the comparative information of industry or previous information of same nature of project. In the absence of such information we cannot established the suitability of the payback period.

Ideal Payback period Example

ABC want to launch a construction project with following cash flow, the payback period of last project was 4 years. Calculate and comment on suitability of payback period.

Intial Investment	USD 1,000
1	300
2	400
3	300
4	500

Solution

	Recover During Year	Cumulative
Initial Investment	USD 1,000	(1000)
1	300	700
2	400	300
3	300	0
4	500

Payback period for the project is 3 year, this payback period is acceptable because last project period was 4 years and this time the payback is better than last project and therefore project should be accepted.