# Payback - Term Overview

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The definition of Pay Back, also known as payback period, refers to a method of analyzing investments. Specifically, the period of time it takes to recover the initial capital invested.

Thanks to Pay Back it will be possible to know the time, usually years, that are necessary to recover the money spent at the beginning of an investment. This is essential to know whether or not it's worth getting involved in a business and the budget that can be managed.

Payback calculation

It's very easy to calculate the Pay Back, especially when the cash flows are all the same exercises. If we take into account that:

F is the value of the cash flows.
I0 is the initial investment of the business.
Pay Back = I0 / F

The best thing will be an investment where the payback period is the best possible.

Payback Examples

Let's say that in the first year of a project 10,000 dollars are invested and at the end of each year for the next four years we obtain income of 2,000 dollars. All cash flows are the same, so the calculation would be as follows:

Pay Back = 10,000 / 2,000 = 5 years

According to this calculation, the time it would take to recover the invested capital would amount to five years.

In the event that the money that we initially dedicate to the project is 10,000 dollars, but the cash flow is variable each year, such as 4,000 dollars the first year, 5,000 the second, 3,000 the third and 2,000 the last year, the scheme would be the one we show you below:

As can be seen, what we analyze here would be the year in which the investment is recovered. In the first two years the project recovers 9,000, with only 1,000 remaining. In the third campaign, 1,000 dollars are exceeded, so the Pay Back is located between two and three years. Further specifying the calculation of the payback period, the 9,000 dollars recovered from the initial investment must be discounted and the remaining amount calculated according to the capital that will be obtained in the third year.

The operation to be carried out would be the following:

Pay Back = 2 years + 1,000 / 3,000 = 2.3 years

If you want to speed up these calculations, Numdea offers us the opportunity with its professional payback calculator.

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