This payback calculator provides you with both simple payback and discounted payback values. The payback method measures the time it takes to recover the initial investment. The payback calculator uses variables that include the cash flow from the investment, opportunity cost, as well as the final value of the investment.
The variables used in our online calculator are defined in detail below, including how to interpret the results.
This is the initial investment made in order to achieve the subsequent cash flow. This can include the purchase of an asset, or an investment in a security such as a bond.
This is the cash flow, or money, that you receive in each time period. A time period can be any length such as a year, quarter, month, week or day.
This is the total number of time periods that you receive the cash flow entered earlier. Please note that the definition (year, quarter, month, week, and day) must be consistent throughout this example.
This is the opportunity cost, or alternative, you have in addition to this investment. For example, if you could invest the money in a bond, or place it in a bank account at 4% rate of interest, then your opportunity cost is 4%.
This is the final value returned to you at the end of the investment period. For example, if you invested $1,000 in a bond and that $1,000 was returned at the bond's expiration, then enter that amount here. For an asset, this could be the salvage value, or current market value, of the investment. Keep in mind this value can be zero in some cases.
This is the simple payback, stated in terms of time periods. The payback method usually requires a threshold number of periods before an investment is considered acceptable. One of the flaws with the payback method is that it ignores the time value of money.
A second payback method is one that uses discounted cash flows. This calculator can accommodate up to ten time periods or years of discounted cash flows.
This is the discounted payback, stated in terms of time periods. The discounted payback method recognizes the time value of money. However this calculation shows us the second major flaw with the payback method: It does not recognize cash returns in excess of the calculated payback period. For example, if the payback is 5 years, the method does not account for cash flows after year 5.
Payback Calculator - Copyright © 2006 - 2015 Money-Zine.com (Last Reviewed on January 27, 2015)
Disclaimer: These online calculators are made available and meant to be used as a screening tool for the investor. The accuracy of these calculations is not guaranteed nor is its applicability to your individual circumstances. You should always obtain personal advice from qualified professionals.