How to Calculate Capital Budgeting Payback Period - Definition, Formula and Example

Learn How to Calculate Capital Budgeting Payback Period - Tutorial

Definition:

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.

Formula:

Payback Period = Initial Investment / Average Annual Cash Flows
Example:

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.

Given

Investment made on machine = $500 Average Annual Cash Flows   = $20

Solution:

Substitute the values in the formula

Payback period = Initial Investment / Average Annual Cash Flows
= 500 / 20
= 25 years

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