Question

How is payback calculated with unequal net cash inflows?

Short answer

Answer

Payback Period = Initial Investment / Net Cash Flow per period

Step-by-step solution

Meaning of Payback Period

The payback period is the time it takes to recover the initial expense. It is the sum of a long time taken to recover the unique consumption of a project. Consequently, the companies can use the payback period to compare projects in capital arrangements and evaluate the time it takes for the initial venture to recover in years.

Calculation of payback with unequal net cash inflows

The payback period (in years) of an investment is computed as followsif net cash inflows are unequal:

Before complete recovery, add the cumulative net cash inflows for full years.

$Payback=Numberoffullyearbeforerecovery+\frac{Unrecoved\cos tatthestartofyear}{Cashflowduringtheyear}$