Explain about pay back method, Financial Management

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Q. Explain about Pay Back Method?

Pay Back Method (PB) :- The payback process is the simplest method. This method computed the number of years required to pay back the original investment in a project. There are two processes of calculating the Payback Period:

First Method: - This method is accepted when the project generates equal cash inflow each year. In such a case payback period is computed as follows:

Payback Period (PB) = Investment / Constant Annual Cash Flow

Second Method: - This method is accepted when the project generates unequal cash inflow each year. Under this process payback period is computed by adding up the cash inflows till the time they become equal to the original investment.

Formula:-

PB = Completed Year + Amount required to equalise the investment/ Amount received during the period

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