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 |

page revision: 4, last edited: 13 Aug 2017 00:00