Payback Period Example for months
In example
the concept of recovery during the year is explained.
ABC Company
started a bridge construction project with initial investment of $ 1200. Expected
Cash inflow for three years is as under. Calculate the payback period.
Initial Investment
|
$ 1200
|
Year 1
|
$ 600
|
Year 2
|
$ 400
|
Year 3
|
$ 400
|
Solution
Years
|
Recovery during the year
|
Cumulative
|
Initial Investment
|
($ 1200)
|
($ 1200)
|
Year 1
|
$ 600
|
$ 600
|
Year 2
|
$ 400
|
$ 200
|
Year 3
|
$ 400
|
($ 200)
|
1.
Calculate years for payback period
Above information
shows that investment recovered during the year 2-3 i.e. 2 years and some months.
Therefore year of recovery is 2.
2.
Calculate month for payback period
= balance to be recovered
at year 2/total amount recovered in year 3
= $ 200/$ 400
= .5 Year i.e. .5 x 12= 6
months
Comments on Example
1. Example involved two steps i.e.
payback period in year and payback period in months
2. Total payback period payback period
in year & month are added.
