Which metric is used to determine the payback period of a capital expenditure?

Which metric is used to determine the payback period of a capital expenditure?

• A. Net investment cash outflow at the beginning of the project
• B. Operating cash flow of investments
• C. Determining pay back period
• D. Net working capital changes

Answer: (C)

Payback period is the measure of how long it takes for the project’s cash inflows to recover the initial capital outlay. Start with the net investment cash outflow at the beginning, then accumulate the subsequent cash inflows until they equal that initial outlay. The point in time when those inflows累 are enough to recover the investment is the payback period itself, so the essential thing you’re calculating is the act of determining that payback time. Operating cash flow and changes in net working capital influence cash availability but do not, by themselves, define the time to recover the initial investment. The traditional payback method ignores the time value of money, unless you’re using the discounted variant.

Payback period is the measure of how long it takes for the project’s cash inflows to recover the initial capital outlay. Start with the net investment cash outflow at the beginning, then accumulate the subsequent cash inflows until they equal that initial outlay. The point in time when those inflows累 are enough to recover the investment is the payback period itself, so the essential thing you’re calculating is the act of determining that payback time. Operating cash flow and changes in net working capital influence cash availability but do not, by themselves, define the time to recover the initial investment. The traditional payback method ignores the time value of money, unless you’re using the discounted variant.