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Pay Back Period

Updated on August 8, 2016

Formula

THe formular is: Total cash outlay / Annual cash inflow

Example

A project requires an capital of $500. yeild $125 annually for 7 years. THe pay back period is:

cash outlay / annual cashinfkow

cash outlay = $500

Annual cash inflow = $125

$500 /$125 = 4 years

That means in 4 years time the concern willstart regaining the amount invested. Within 4 years $500 will be made.

In Constant

For 7 years the person will make $875 where cash flow is not constanmt. The pay back period can be assummed to be dividing the initial expenditure by the average of cash inflow.

Futher Example.

A purchased car for commercial for $10,000 , estimated life being 4 years. It assumed the car earn as follows:

Year 2016 = $4000

" 2017 = $5000

" 2018 = $4000

" 2019 = $3000

The pay back period is :

cash out flow / average cash inflow

$4000 + $5000 + $4000 + $3000 / 4 =$4000

Pay back period = $10000 / $4000 = 2.5 = 2 1/2 years.

So in 2 1/2 years A will receive his money

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    • Michael  Anyanwu profile image
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      Michael Anyaanwu 12 months ago from Onitsha

      wonderful