Copyright

Payback Analysis: Formula & Example

Payback Analysis: Formula & Example
Coming up next: Process Approach to Management: Definition & Concept

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:01 What Is Payback Analysis?
  • 0:54 Formula
  • 1:28 Example
  • 2:44 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Shawn Grimsley
Payback analysis is an important financial decision-making tool. In this lesson, you'll learn what it is and how to apply the formula, and you'll see an example of payback analysis. You'll also have a chance to take a short quiz after the lesson.

What Is Payback Analysis?

Payback analysis is a mathematical methodology to determine the payback period for an investment. The payback period is how long it will take to pay off the investment with the net income derived from the asset or project. In colloquial terms, it calculates the 'break even point.' The payback period is usually measured in fractions of years.

Payback analysis can provide important information for decision-making. It provides a means to manage risk. You can use payback analysis to determine whether an asset or project will pay for itself in an acceptable period of time. Shorter payback periods are usually viewed as less risky. Additionally, you can also use the method to compare potential assets or projects to see which will recoup its costs quicker. The payback method is certainly not the only financial metric that should be relied upon when making an investment decision, but it is a useful tool.

Formula

Now, let's take a look at the formula necessary for payback analysis. The payback formula is simple. The payback period is the total investment required to purchase the asset or fund the project divided by the net annual cash flow, which is gross cash flow minus expenses, generated from the asset or project.

The formula is:

Payback Period = Initial Investment / Annual Net Cash Flow

Now that we know the formula, let's take a look at an example and use our payback formula.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support