The annual cash flow is divided by the cost of the investment until the cumulative cash flow is positive, which is the payback year, at which point the payback period is determined. Years are typically used to express the payback period.
Payback period =6.3 months
How do I calculate payback period?
- The annual cash flow is divided by the cost of the investment until the cumulative cash flow is positive, which is the payback year, at which point the payback period is determined. Years are typically used to express the payback period.
- How long it would take a business to generate enough cash flow to recoup the initial investment is determined by the payback period. The expected return on a project is measured by its internal rate of return; if it exceeds the cost of capital, the project is good.
- By dividing the cost of the capital investment by the anticipated annual cash inflows from the investment, the payback period can be calculated.
Payback period = Initial investment / Cash inflows per period
6000 / 950 = 6.3 months
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