Computation of Payback Period Method
1. Under uniform annual incremental cash inflows - if the venture or an asset generates uniform cash inflows then the payback period (PBP) will be given by:
PBP = Initial cost of the venture/Annual incremental cost
As like whether a venture costs 37,910/= and promises returns of 10,000/= per annum indefinitely then the PBP = 37,910/10,000
= 3.79 years
So in shorter the PBP the more viable the investment and therefore the better the option of that investments.
2. Under non-uniform cash inflows - Under non-uniformity PBP calculation will be in cumulative form and because the net cash inflows are accumulated each year till initial investment is recovered.