Introduction to this document

Payback period calculator

You may be asked to help decide which resources within your business to allocate to certain projects. One way of doing this is to compare the payback period of those competing for investment.

Payback

Obviously, what needs to be considered when making financial decisions is: (1) the expense (the “investment”); and (2) the return on that investment. Expenses are either one-off or ongoing. Returns are most often received over time. Apart from checking the figures, you can initially bring your expertise to bear in identifying hidden or indirect costs and adding them to the total investment figure.

You can build this effect of time into your analysis by calculating a payback period. This is the time it takes for the benefits of a change to repay its costs. Many companies look for payback on projects over a specified period of time, e.g. three years. The shorter the payback period, the more likely it is to be introduced. Once you have established the total cost of the investment and the returns (per annum) that it is expected to generate, use our Payback Period Calculator to arrive at the payback period for your project.

Loan interest

Payback period is more important than the overall benefit of a project if your business has to borrow to fund it. If your company is going to borrow money to fund the cost of the initial investment, you should also calculate the interest costs and incorporate these into your “total investment” figure in your payback period calculator.

 

Document

payback period calculator

02 Jan 2013
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