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Introduction

The Payback Period Calculator is a valuable tool for estimating the time required to recover an initial investment. This article will not only explain the regular payback period but also delve into the discounted payback period, considering the time value of money. Both calculations can be crucial when evaluating investment options alongside metrics like net present value (NPV) and internal rate of return (IRR).

Regular Payback Period

The regular payback period is the time it takes for an investment to recoup its initial cost. The formula is simple: ��=��PP=CI​ where:

  • ��PP is the payback period in years,
  • �I is the total investment,
  • �C is the annual cash inflow.

For example, if you invest $100,000 in an apartment generating $24,000 annually, the payback period would be 100,00024,000=4.1724,000100,000​=4.17 years.

Discounted Payback Period

To consider the time value of money, the discounted payback period is used, incorporating a discount rate. The formula is a bit more complex: ���=�+��DPP=X+ZY​ where:

  • ���DPP is the discounted payback period,
  • �X is the year before the last negative balance,
  • �Y is the cumulative cash flow in the last negative year,
  • �Z is the discounted cash flow in the year following the last negative year.

Irregular Cash Flows

In cases of irregular cash flows, where the income varies each year, a step-by-step approach is necessary.

  1. Cash Flow Table:
    • List the cash flow for each year, considering expenses as negative values.
  2. Present Value Calculation:
    • Calculate the present value of each cash flow using the discount rate.
  3. Cumulative Present Value:
    • Find the cumulative present value by adding cash flows.
  4. Determine Break-Even Year:
    • Identify the year when cumulative present value turns positive.
  5. Discounted Payback Period:
    • Use the formula to calculate the exact discounted payback period.

Example

Suppose an apartment investment has varying cash flows and a 5% discount rate: ���=6+5,88717,056=6.35 yearsDPP=6+17,0565,887​=6.35 years

To simplify this process, utilize an online Payback Period Calculator for efficient calculations.

Invest wisely! 😊

For more rental-related calculations, explore our rental commission calculator and rent calculator, aiding in decision-making processes.