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LSDefine
Simple English definitions for legal terms
payback method
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A quick definition of payback method:
Payback method: A way to figure out how long it will take to get back the money you put into a project or business. It helps you see if your investment is worth it or not.
A more thorough explanation:
The payback method is an accounting technique used to determine the amount of time it takes for a business to recover its initial cash investment. This method is commonly used to evaluate the profitability of a project or investment.
Let's say a company invests $10,000 in a new project. The payback period is calculated by dividing the initial investment by the expected annual cash inflows. If the project is expected to generate $2,000 in cash inflows each year, the payback period would be five years ($10,000 ÷ $2,000 = 5).
Another example could be a small business owner who invests $50,000 in a new product line. The payback period is calculated by dividing the initial investment by the expected annual cash inflows. If the product line is expected to generate $15,000 in cash inflows each year, the payback period would be just over three years ($50,000 ÷ $15,000 = 3.33).
These examples illustrate how the payback method can be used to determine the amount of time it takes for a business to recover its initial investment. By calculating the payback period, businesses can make informed decisions about whether or not to invest in a particular project or investment.