The payback period refers to how long it takes to reach that breakeven. The answer is found by dividing $200,000 by $100,000, which is two years. The second project will take less time to pay back, and the company’s earnings potential is greater. Uses of Payback Period in Corporate Finance According to payback method, the […]
Unlike other methods of capital budgeting, the payback period ignores the time value of money (TVM). This is the idea that money is worth more today than the same amount in the future because of the earning potential of the present money. Although calculating the payback period is useful in financial and capital budgeting, this […]
The time value of money is the idea that cash will be worth more in the future than it is worth today, due to the amount of interest that it can generate. This is another reason that a shorter payback period makes for a more attractive investment. The payback period is calculated by dividing the […]
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