The formula to calculate the payback period of an investment depends on whether the periodic cash inflows from the project are even or uneven.If the cash inflows are even (such as for investments in annuities), the formula to calculate payback period is:When cash inflows are uneven, we need to calculate the cumulative net cash flow for each period and then use the following formula:Where,A is the last period number with a negative cumulative cash flow;B is the absolute value (i.e.
Payback Period is one of the oldest and simplest methods to evaluate investment proposals and is widely used in the small scale sector.
Payback Period formula just calculates the number of years which will take to recover the invested funds from the particular business. We can compute the payback period by computing the cumulative net cash flow as follows: Payback period = 3 + (15,000 * /40,000) = 3 + 0.375 = 3.375 Years * Unrecovered investment at start of 4th year: (1). Payback Period Formula For example, a particular project cost USD1 million and the profitability of the project would be USD 2.5 Lakhs per year. Because the cash inflow is uneven, the payback period formula cannot be used to compute the payback period. Payback period is calculated based on the information available from the books of accounts of a business entity.
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