Pay back period is a term in accounting and financial management that concerned with any investment for a project and potential period of return back of the investment. Pay back period is the time length of recovery of investment cost.
Any company may find two or more project for investment for potential benefits. Which project should company select to undertake and what should be reject is determine by pay back period.
Because of the extreme level of simplicity in pay back period it is more important in financial decision making. Time value of money is considered in pay back period unlike Net present value, Internal rate of return.
In terms of pay back period Opportunity cost is considered.
Let us consider, two project A and B, company is trying to select. Now the question is what should be select?
The initial investment of project A is 1 core that will save cash 10 luck per year. Hence, 10 years need to recovery of investment.
Project B need 1 crore of initial investment but there no cash savings. But yet there have a chance of incremental earning 20 lucks per year. Hence, 5 years to need to recover the investment cost.
Considering these project B is better to select.
Any company may find two or more project for investment for potential benefits. Which project should company select to undertake and what should be reject is determine by pay back period.
Because of the extreme level of simplicity in pay back period it is more important in financial decision making. Time value of money is considered in pay back period unlike Net present value, Internal rate of return.
In terms of pay back period Opportunity cost is considered.
Let us consider, two project A and B, company is trying to select. Now the question is what should be select?
The initial investment of project A is 1 core that will save cash 10 luck per year. Hence, 10 years need to recovery of investment.
Project B need 1 crore of initial investment but there no cash savings. But yet there have a chance of incremental earning 20 lucks per year. Hence, 5 years to need to recover the investment cost.
Considering these project B is better to select.