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Investment appraisal techniques

Payback

The payback period is the time a project will take to pay back the
money spent on it; the time which elapses until the invested capital is
recovered.

Initial investment
Payback period = ––––––––––––––––
Annual cash inflow

Compare the payback period to the company’s maximum return time
allowed and if the payback is quicker the project should be accepted.

Faced with a choice between mutually exclusive projects, chose the
project with the quickest payback, provided it meets the company’s
target payback period.

Illustrations and further practice

Now read illustration ‘Payback’ and attempt example 7 ‘Mickey Continued 2’ from
Chapter 10.

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