Payback

In this lesson

1. 0:00 Payback period: concept and definition
2. 0:47 How payback period works as screening tool
3. 2:22 Advantages and disadvantages explained
4. 3:23 Worked example: calculating payback period
5. 8:54 Discounted payback period fundamentals
6. 11:41 Worked example: discounted payback calculation

About this lesson

This video covers the concept in detail, working through practical examples to show you when and how to apply payback analysis, why it matters as a screening tool, and its key limitations. You'll also discover why discounted payback period is often the superior method because it accounts for the time value of money, making your investment decisions more robust and aligned with shareholder value. In the first section, we explore standard payback period: what it is, how to calculate it, and when businesses use it in practice. You'll see how to work with cash flows rather than accounting profits, handle depreciation adjustments, and interpret results—including how to express payback in years, or break it down to the nearest month when required. The video walks through a detailed example with Build Co's machinery investment, showing the step-by-step process of building a cumulative cash flow table and identifying the exact point where the investment pays for itself. The second half introduces discounted payback period, which applies the same logic but incorporates discount factors to reflect the time value of money. Using a 10% cost of capital example, you'll learn how to discount each year's cash inflows back to present value, recalculate cumulative cash flows on a discounted basis, and determine when the project truly breaks even in real economic terms. This method is more rigorous because it recognises that money today is worth more than money in the future, giving you a fairer comparison between investment options and better alignment with what your investors actually need.

Duration: 17m