Cash Payback Technique: Definition & Formula

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  • 0:05 What is the Cash…
  • 0:42 Capital Projects
  • 1:34 Cash Payback Period
  • 2:59 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

When determining whether or not to make a capital investment, the cash payback technique is useful for providing a quick estimate to see if a project is worth further attention. In this lesson, we will look at the cash payback technique in more detail, as well as learn the accompanying formula.

What Is the Cash Payback Technique?

Businesses often have to consider many different possible expenditures meant to make money. How do they quickly analyze which ones are worth the time of exploring, which are worth investing in, and which should just be disregarded? While each company is different, one of the most useful methods for making these decisions is the cash payback technique. Simply put, the cash payback technique helps managers and decision makers calculate how long it will take to make their investment back. In this lesson, we'll see how it is used on capital projects, look at the formula for finding it, and learn what an ideal cash payback score looks like.

Capital Projects

While many of us may see the words capital projects and think big, expensive projects, that is not the case at all. Anything that adds to the capital, or working ability of a company, can be considered a capital project. For example, in addition to being used to examine the feasibility of a new site or store for a company, the cash payback technique can also be used on other capital expenses, such as finding out if it is worth purchasing a new computer, hiring a contractor, or even providing an employee with a company car.

But wait, how do you even use the cash payback technique? Not surprisingly for a system that was designed to be used quickly, it is relatively easy. To use the cash payback technique, simply divide the cost of the capital improvement or investment by the new money it is expected to generate or save every year. This should give you a result in years.

Cash Payback Period

This is known as the cash payback period and is the amount of time until an improvement has recouped its costs, and is making money that goes towards the profitability of the whole company.

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