Importance of Calculating Your Payback Period in Excel

The Payback Period is defined by calculating the time required to recover an investment which is usually in years. A break-even investment point is then determined.

There may either be a short or long payback period on an investment. A shorter payback period suggests that the investment will be 'repaid' fairly soon, i.e. the cost of the investment will be easily recovered by the cash flow created by the investment. The PBP of a certain security investment is a potential determinant of whether to continue with the security project since, for some organizations, longer PBPs are usually not desirable.

It should be noted that PBP ignores any advantages that emerge after the specified period of time and does not assess profitability. In addition, the definition does not take into account either the time value of cash or opportunity costs. PBP can be measured as the cost of expenditure in safety divided by the annual inflows of benefits.

There are still some importance of calculating your payback period in excel:

• The payback period in capital budgeting refers to the period of time needed to "repay" the sum of the initial investment for the return on an investment.
• In times of uncertainty, it can be used for preliminary assessment or as a project screening device for high risk projects.
• It is extremely easy to understand and solve the Payback Period equation in Excel. The payback period will probably be measured without even using a calculator or electronic spreadsheet while engaging in a rough review of a proposed project.
• Risk is considered up front, and if the investment is a bad idea to begin with, it is possible to get a clear picture rather quickly.
• Since this analysis favors ventures that rapidly return money, investments with a higher degree of short-term liquidity tend to result.
• The payback approach has no clear criterion for decision-making as a stand-alone instrument to compare an investment, except, perhaps, that the payback period should be shorter than infinity.

The determination of the payback period in excel will serve as a useful way for organizations to see how feasible a project is. Make sure that you are happy with the payback period you have set before taking on a new project or spending the cash for a new project.

If a project has the opportunity to produce new revenue, it is worth considering only if you can break even - and even better if you can break even before the set time limit.

Determining your payback period in excel helps you in a lot of other ways, than just knowing when you will be repaid from your investment. Don’t miss out this opportunity and do this analysis today!

Report this Page