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.