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“Payback period is the time when a business recovers all of its initial investments or crosses its break-even point.” After crossing the break-even point a business becomes independent of its cash flows and provides pure benefits to the investors. A Payback Period Calculator can make the picture quite clear to you when your start-up business will be able to cross the break-even point. After the payback period, you would be able to grab pure profitability, and the payback calculator makes it simple to determine the payback period. Businesses always try to determine a payback period of investments, to find the real sense of the profitability and the timeline for crossing the break-even points. The Payback Period Calculator is used to find the projected cash flows and the break-even point.
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Break Even Point:
Break-even point is a point where a business recovers all its initial investments. A Business taking just too much time to cross the break-even point means your business idea is outdated and the target market is not attracted to your business. If your cash flow calculation indicates,
Your business is taking too prolonged a time to cross the break-even point.
Then you need to alter your business idea or the marketing comparison. The marketing campaign may include the 4 P’s(Product, Price, Place, Promotion). It can possibly cash flow calculator to indicate your business is not generating up-to-the-mark profitability. In this situation, one needs to do the SWOT(Strengths, Weaknesses, Opportunities, Threats) in the business environment. The business environment may include the micro or the macro environment of business.
How to Calculate the Payback Period?
We can determine the payback period by knowing our initial investment and annual cash flows.
The payback Period Calculator makes it easy to find the projected cash flows and the break-even point.
Practical Example:
Consider we have an initial investment of $ 5000 and investing in a business for 10 years. The discount rate is 3.5 % and the percentage increase in the business is 10 % annually. Find the Payback period and the Break-even point.
Given:
Initial investment of $ 5000
Investment time = 10 years
Discount rate is = 3.5 %
Percentage increase = 10 %
Solution:
| Cash Flow | Net Cash Flow | Discounted Cash Flow | Net Discounted Cash Flow | |
|---|---|---|---|---|
| Year 0 | $-5,000.00 | $-5,000.00 | $-5,000.00 | $-5,000.00 |
| Year 1 | 60,000.00 | 55,000.00 | 57,971.01 | 52,971.01 |
| Year 2 | 66,000.00 | 121,000.00 | 61,611.71 | 114,582.72 |
| Year 3 | 72,600.00 | 193,600.00 | 65,481.04 | 180,063.76 |
| Year 4 | 79,860.00 | 273,460.00 | 69,593.38 | 249,657.14 |
| Year 5 | 87,846.00 | 361,306.00 | 73,963.97 | 323,621.11 |
| Year 6 | 96,630.60 | 457,936.60 | 78,609.06 | 402,230.17 |
| Year 7 | 106,293.66 | 564,230.26 | 83,545.86 | 485,776.02 |
| Year 8 | 116,923.03 | 681,153.29 | 88,792.70 | 574,568.72 |
| Year 9 | 128,615.33 | 809,768.61 | 94,369.05 | 668,937.77 |
| Year 10 | 141,476.86 | 951,245.48 | 100,295.61 | 769,233.38 |
The payback Period Calculator is a free online tool for the projected cash flows and the break-even point.
Payback Period = 0.083 years
Discounted Payback Period = 0.086 years
Conclusion:
Payback Period is essential to know the time period required to cross the break-even point. The Payback Period Calculator makes it possible to determine the expected time period to recollect all of your initial investment. Knowing your payback period is necessary to take any decisions, whether you are investing or retrenching from the business. We can take the alternative if we are able to forecast the growth of business investment.
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