∎ **PAYBACK PERIOD...**

🧮 is a financial formula used to measure the time to recover initial investment

💰 helps assess risk and feasibility

💸 is calculated by adding up cash flows until investment is fully recouped

**∎ IT IS KEY TO REMEMBER THAT...**

👍 shorter payback periods indicate good investments

👎 longer payback periods may not be worthwhile

👨💼 this is used by investors to compare investment opportunities

💼 it’s also used by businesses to determine project viability

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📈 Payback period shows **how long it takes **for a business to **recover an investment**➠it is in fact a **financial metric **used to measure the **length of time required **for an **investment **to **generate enough cash flows **to **recover its initial cost**;

💰 This techinique is a way of assessing the risk associated with an investment and helps investors evaluate the feasibility of a project;

💸 The payback period is calculated by adding up the cash flows generated by the investment over time until the initial investment is fully recovered;

👍 If the payback period is shorter than the expected lifespan of the investment, then it is considered a good investment;

👎 However, if the payback period is longer than the expected lifespan of the investment, then the investment may not be satisfying and worthwhile;

👨💼 Investors can use the payback period to compare different investment opportunities and make informed decisions about where to allocate their capital;

💼 Businesses can use the payback period to determine whether a project is financially viable and whether it is worth pursuing.

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∎ **FORMULA AND EXAMPLE**

✎The formula is:

**PAYBACK PERIOD =**

**Years before break-even + (Unrecovered Amount/Cash Flow in Recovery Year)**

✎Let's say a company is considering investing $50,000 in a new machine that is expected to generate cash flows as follows:

Year 1: $10,000

Year 2: $20,000

Year 3: $15,000

Year 4: $8,000

Year 5: $7,000

✎To calculate the payback period, the company needs to determine how long it will take to recover the initial investment of $50,000 and different cash flows for each of the 5 following years:

Year 1: $10,000

Year 2: $30,000 ($10,000 + $20,000)

Year 3: $45,000 ($10,000 + $20,000 + $15,000)

Year 4: $53,000 ($10,000 + $20,000 + $15,000 + $8,000)

(here we have reached 50,000, then this is the recovery year and the previous one indicates years before break-even)

Year 5: $60,000 ($10,000 + $20,000 + $15,000 + $8,000 + $7,000)

✎Given the formula as above...

**PAYBACK PERIOD =**

**Years before break-even + (Unrecovered Amount/Cash Flow in Recovery Year) =**

**3 + (50,000 - 45,000)/8,000 =**

**3.625 years =**

**3 years and 7.5 months **

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