Traditional Pay Back Period

This payback period tends to estimate how long it takes a given sum of money invested to be recouped. It does not take inflation into consideration; thus, the impact of discounting is nil. It is therefore referred to as the traditional payback period.

Question1 – Payback in Years

If $250,000 is invested on a project with the following cash inflows, determine the payback period

Year-1	Year-2	Year-3	Year-4	Year-5
$45,000	$80,000	$65,000	$60,000	$40,000

Solution
The table below shows the the capital outlay of $250,000 and the respective cash inflow.

From the table above, successive cash inflow was used to offset the balance of the capital outlay. Thus, at year 4, the capital outlay had been fully recouped, meaning this is where the project will payback fully. This is where the balance is nil.