How to calculate payback period | FIN-Ed

#fin-ed
How to calculate payback period | FIN-Ed
This video is about the payback period. First, I will explain what the payback period is; second, how to calculate the payback period; and finally, how to make decisions based on your results. The payback period is the length of time required for an investment’s cash flows to cover its cost. You can also call it the length of time to reach break-even. Generally, the earlier you get your initial investment back, the better.

Example: Your division is considering two projects with the following cash flows (in millions). What are the payback periods for both projects and which project will you accept?

Source: Fundamentals of Financial Management (Concise Edition) Brigham and Houston
Chapter 11: The Basics of Capital Budgeting
Problem: 11-6

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