Payback Period — Microsoft Excel
In this article, we will walk you through the fantastic journey of learning payback period in accounting and finance using excel. As we heard a term payback, which means how we get back our money or investment by selling out products and from that money we can invest in another project of company again.
Payback Period
It shows how soon we get back our money/investment. The sooner we get our investment back, the sooner we can reinvest it to make more money.
If the payback period is higher, we should avoid the project. It has a disadvantage,
it ignores the time value of money. Calculating the payback period is a quick task. We will get back our investment in 3.43 years. As per the figure below.
Firstly, we check the inflow balance and pending balance form investment. In our example, it is completed in the 4th Year, so we calculate the ratio between 15 and 35, which comes to 0.43. So, the payback period is a total of 3.43 years.
Discounted Payback Period
A combination of NPV, IRR and DPB, Discounted Payback period gives a better idea for investment. It is a much better metric than
the normal payback period.
Let us take the same example with discounted rate of 10%.
We will get our investment back in 4.32 years, as shown in the above figure.
Firstly, we check the discounted cash inflow balance and pending balance from
investment. In our example, it completes in the 5th Year, so we calculate the ratio between 4.94 and 15.52, which comes to 0.32. So, the discounted payback period is a total of 4.32 years.
Note that the discounted cash flow of S. No. C is the same as that in the NPV example. The discounted cash inflow is equal to the total inflows every year but, note that the discounted cash flow of S. No. C is the same as that in the NPV example. The discounted cash inflow is equal to the total inflows every year.
Conclusion
Finally, we will take a descriptive drive of payback period in finance and along with that we also understanding the important concepts that is frequently used by finance professionals when they deal with the payback and they also used cash that they catch up from customers and clients, re-invest in another business project for scaling up the company.
