What is the Payback Period?
The payback period is used to measure how long it would take for the business to recuperate its investment. Normally, it is measured in months or in years.
What are the methods of computing the Payback Period?
There are different ways of computing for the payback period.
As to the period:
- by Month
- by Quarter
- by Year
As to the measurement of cash:
- Discounted – uses the PRESENT VALUE of cash.
- Undiscounted – uses the FACE VALUE of cash.
The most commonly used for feasibility studies is the undiscounted method by month or by year.
How to compute for the Payback Period?
First, assess which method is required by your school. Then, identify the needed data:
- Initial Capital / Cost of Investment
- Operating Cash Flow
Let’s say for example your school requires you to use an undiscounted payback period (yearly). Provided the following data:
Step 1.
Create a table with four columns for Year, Operating Cash Flow, Capital/Investment Balance, and Count/Period Spent.
*You may opt to use a different header title.
Then fill in the available data. See the below example.
IMPORTANT NOTE: Some schools prefer to use a negative balance for the initial capital while others prefer the positive value but regardless of the sign, results would remain the same. If your school prefers to start with a negative balance, change the signs in the succeeding steps.
Step 2.
Compute the capital balances for the operating years. Use the formula:
Current Year Balance = Previous Year Balance – Current Year Operating Cash Flow
See the below sample computation:
Step 3.
Starting the initial year of operations. Add 1 on Period Spent if the Capital Balance is positive.
See the below example:
Step 4.
For the first negative capital balance, compute the time spent to earn the remaining capital balance. Use the formula: 
See the below example:
IMPORTANT NOTE: No value should be added to the succeeding negative balance. You may keep it blank or remove that row completely.
Step 5.
Total the period spent. See the below example:
If you want to measure it by months, simply multiply the payback period by 12. You may round it up if your school does not prefer decimals.
Based on the above example, shows that the payback period will be a little over 3 years or 37 months [3.05 x 12 = 36.6; Round up (36.6)=37].
For the discounted method, the process is almost the same. You just need to use the present value of cash instead of the face value.
To make it even easier, just use the template made by Feasib Accountant that you can download at the lower part of this article.
How to use the Feasib Accountant's Payback Period template?
- Select which template is most applicable to your school whether you need monthly or yearly.
- Simply fill in the data to the template on white-shaded cells. Then copy the data to your paper.
- The forecast is for the 10-year period. You may hide the cells not needed on your papers.
- You may opt to edit the format or hide the empty cells based on your school’s reference.
