From the course: Investment Evaluation

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Payback period

Payback period - Microsoft Excel Tutorial

From the course: Investment Evaluation

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Payback period

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- [Instructor] The payback period is simply the amount of time it takes to get your money back. It's another helpful metric that you can use to guide whether you choose to take on a specific project. I wanna be clear from the get go that the payback period breaks my cardinal rule and my heart and absolutely ignores the time value of money. You should definitely look at DCF, NPV, and IRR as the headliners, and the payback period as the starting act. Another way to think about the payback period is that it's the break even point, or the point at which positive cash flows and negative cash flows incur to date net to zero. By calculating the cumulative cash flows it's easy to see when the cash flows flip from being negative to being positive. If it doesn't flip exactly at a certain year then you just need to find the portion of the following year that it takes to recover the remaining cash outlay. I also wanna make a quick note here, I'm assuming continuous cash flow throughout the year…

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