Credit card pay back period calculation
How do you calculate pay back period?
The payback period is calculated by dividing the amount of the investment by the annual cash flow. Account and fund managers use the payback period to determine whether to go through with an investment. One of the downsides of the payback period is that it disregards the time value of money.
What is payback period with example?
The payback period is expressed in years and fractions of years. For example, if a company invests $300,000 in a new production line, and the production line then produces positive cash flow of $100,000 per year, then the payback period is 3.0 years ($300,000 initial investment ÷ $100,000 annual payback).
What is a good payback period?
Broadly, the consensus is: For B2C businesses , a payback period of less than 1 month is GREAT, 6 months is GOOD, and 12 months is OK. And the exceptional cases can pay back their acquisition costs on the first transaction.
Is payback period complicated to calculate?
Payback period is very simple to calculate. It can be a measure of risk inherent in a project. Since cash flows that occur later in a project’s life are considered more uncertain, payback period provides an indication of how certain the project cash inflows are.
How do you calculate discounted payback period and payback period?
First, we must discount (i.e., bring to the present value) the net cash flows that will occur during each year of the project. Second, we must subtract the discounted cash flows from the initial cost figure in order to obtain the discounted payback period.
What are advantages of payback period?
Payback period advantages include the fact that it is very simple method to calculate the period required and because of its simplicity it does not involve much complexity and helps to analyze the reliability of project and disadvantages of payback period includes the fact that it completely ignores the time value of …
What are the disadvantages of payback period?
Disadvantages of the Payback Method
Ignores the time value of money: The most serious disadvantage of the payback method is that it does not consider the time value of money. Cash flows received during the early years of a project get a higher weight than cash flows received in later years.
What are the limitations of payback period?
Limitations of using the Payback Period in evaluating an…
- Cash Flows after Payback. The payback period fails to consider the cash inflows after the payback period is over. …
- Cash Flows Ignored. …
- Cash Flow Patterns. …
- Administrative Problems. …
- Independent of Shareholders’ Value Maximization.