VAE 511: Livestock Entrepreneurship (1+0)

PAY BACK PERIOD

• Payback period refers to the period of time required for the return on an investment to 'repay' the sum of the original investment. For example, a Rs.1000 investment which returned Rs.500 per year would have a two year payback period. Shorter payback periods are obviously preferable to longer payback periods, other things being equal.
• Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most individuals.
• The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not properly account for the time value of money , risk , financing or other important considerations such as the opportunity cost.
• It is generally agreed that this tool for investment decisions should not be used in isolation.
• Alternative measures of 'return' preferred by economists are net present value and internal rate of return. An implicit assumption in the use of payback period is that returns to the investment continue after the payback period.
• There is no formula to calculate the payback period, excepting the simple and non-realistic case of the initial cash outlay and further constant cash inflows or constant growing cash inflows.
• Pay back period is a simple technique of ranking projects based on the actual period of time in which one can get back total investment.

P = I/E

• where, P is the pay back period
• I is the total investment made in the project and
• E is the net cash revenues / net revenues per annum.