5. Payback Period

 
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Overview

The payback period is a useful calculation when deciding between two projects with the same rate of return

Lesson Notes

Payback period

- Calculates how many years it will take to recover initial investment
- Can be used to choose between projects with similar rates of return
- Should not be used as the primary valuation method for investments

Calculating the payback period

- For each year, calculate cumulative cashflows since the beginning of the project
- The first year the cumulative cashflows are greater than the initial investment = payback period

Why payback period should not be used as primary valuation method

- Payback period does not take into account the time value of money
- Payback period ignores the value of all cashflows after the payback period

Keyboard shortcuts

SHIFT + →: Select next cell
CTRL + SHIFT + →: Select all cells within data region
F2: Jump back inside a formula
F4: Anchor cells

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