Section 2
The Payback Method
Book
Version 3
By Boundless
By Boundless
Boundless Finance
Finance
by Boundless
5 concepts
Defining the Payback Method
The payback method is a method of evaluating a project by measuring the time it will take to recover the initial investment.
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Calculating the Payback Period
To calculate a more exact payback period: Payback Period = Amount to be initially invested / Estimated Annual Net Cash Inflow.
Discounted Payback
The payback method is more effective at accurately projecting payback periods when it is discounted to incorporate the time value of money.
![Thumbnail](../../../../../../figures.boundless-cdn.com/14688/square/turbine-hall-december-2002.jpeg)
Advantages of the Payback Method
Payback period as a tool of analysis is easy to apply and easy to understand, yet effective in measuring investment risk.
![Thumbnail](../../../../../../figures.boundless-cdn.com/14689/square/zhuhai-sea-front.jpeg)
Disadvantages of the Payback Method
Payback period analysis ignores the time value of money and the value of cash flows in future periods.