In Capital Budgeting, the time period which is needed to repay the loan amount is termed as the 'payback period'. This method firmly decides whether the assets of an enterprise are worthwhile to follow or not.
Company hiox is planning to undertake a project requiring initial investment of $500 million. The project is expected to generate $20 million per year for 6 years. Calculate the payback period of the project.
Investment made on machine = $500 Average Annual Cash Flows = $20
Substitute the values in the formula
| Payback period | = Initial Investment / Average Annual Cash Flows |
| = 500 / 20 | |
| = 25 years | |
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