Simple Payback: Examples

Simple Payback Examples
These examples involve finding out how long until you are made whole (payback period) on an investment.
The payback period is the time such that the sum of the costs and the benefits is equal to zero.


Example 1:
An initial cost of $10, with a benefit of $5 for the next 5 years.
Year Asset
0 -10
1 5
2 5
3 5
4 5
5 5
Solution:
The payback period is simply 2 years.
Year Asset Sum
0 -10 -10
1 5 -5
2 5 0
3 5 5
4 5 10
5 5 15

Example 2:
An initial cost of $10, with a benefit of $3 for the next 5 years.
Year Asset
0 -10
1 3
2 3
3 3
4 3
5 3
Solution:
In this example, there is no period where the sum is equal to zero.
Therefore, you say the payback period is between 3 and 4 years.
Year Asset Sum
0 -10 -10
1 3 -7
2 3 -4
3 3 -1
4 3 2
5 3 5

Example 3:
An initial cost of $10, with a benefit of $6 for the next 2 years, AND…
An additional cost of $15 in year 3, with a benefit of $8 for the next two years.
Year Asset
0 -10
1 6
2 6
3 -15
4 8
5 8
Solution:
In this example, again there is no period where the sum is equal to zero.
There are also two periods where the sum changes from negative to positive.
Therefore, you say the payback periods are between years 1 & 2 and 4 & 5.
Year Asset Sum
0 -10 -10
1 6 -4
2 6 2
3 -15 -13
4 8 -5
5 8 3
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