How to Calculate a Simple Regular Payback

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It is important to calculate the simple regular payback of any potential investment before deciding if it is a good idea to go ahead with it or not. Many businesses use simple regular payback calculations to determine if a new piece of equipment is a solid investment or not. This calculation helps to determine when an investor, or buyer, will see a profit from an something they are considering investing a sum of money into.

  • Divide the total cost of the investment by the projected annual cash inflow.

  • Take the average of the cash inflows, if you predict different annual inflows during the payback period.

  • Use the sum of this equation as the payback period. For example, if the total investment is $10,000 and the annual cash inflows are $2,000, the payback period is five years.

  • Take the length of the payback period and use it as a method to determine whether the investment is worthwhile or not. It may also be helpful to perform a breakeven analysis in conjunction with the simple regular payback calculation, when making a decision involving a major financial investment.

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