How to Calculate Payback Period Formula in 6 min.
(Basic) Tutorial Lesson Review
Okay and welcome back again to MBAbullshit.com.
Alright?
So our topic for this video is payback period, alright?
So the topic for this video is payback period.
What is a payback period and how to find the payback period?
So remember you can go back MBAbullshit.com for more help on lots of cool different business
topics.
Okay?
So for example, okay for example, you invest one hundred dollars on a business and the
free cash flow or the earnings, okay?
If you haven’t watched my video yet about free cash flow, don’t worry.
Imagine that free cash flow is similar to income or profit or earnings, okay?
So what if you invest one hundred dollars in a business and you earn cash or cash flow
of forty dollars in the first year, thirty dollars in the second year, thirty dollars
in the third year, twenty-four dollars in the fourth, and fifteen dollars in the fifth
year.
Okay?
When is your payback?
Okay?
When is your payback?
How long is your payback period?
Okay, to do this you need to do a special step wherein you find out the collected accumulative
or accumulated or total collected payback.
Now how do you do that?
It’s actually very simple.
In year one, it’s the same.
Okay?
You earn forty dollars in year one so your total collected payback is forty dollars.
For year two, your collected payback is the cash flow from year one plus the cash flow
from year two.
So that is seventy dollars.
Okay?
Forty plus thirty equals seventy.
Alright?
Now what is the collected payback in year three?
Well same thing forty plus thirty, forty in the first year plus thirty in the second year
plus thirty in the third year.
So your collected payback over here is one hundred dollars.
Forty plus thirty plus thirty equals one hundred.
Okay?
You do the same thing in the forth year, okay?
Forty plus thirty plus thirty plus twenty-four equals one hundred twenty-four, and you do
the same thing for the fifth year.
Forty plus thirty plus thirty plus twenty-four plus fifteen equals one hundred thirty-nine
dollars.
So the question now is when is your payback period?
Well, the important thing here is to look at the collected payback column and not anymore
the cash flow column, and you will find that you already have payback here.
Okay?
At year three.
Why?
Because at year three, you already have one hundred dollars which is the same as your
one hundred dollar investment over there.
Okay?
So we can now say that your payback period is three years.
Why is it three years?
Because you get your payback, okay, on year three.
So you get your payback in year three that means your payback period is three years.
Alright?
So now why is this important?
Why do we need to know the payback period of an investment?
Well it’s very simple.
The rule of thumb or the basic rule of thumb is that the shorter the payback period is
then the better it is for you, okay?
So if you’re a businessman then you want a shorter payback period because that means
that you get your money back faster.
Okay?
If you have a longer payback period then it takes a longer time to get your money back.
Okay?
So now that you know the basic concept of payback period, you are ready for our next
video on discounted payback period which is actually better for business students and
is also better to use this in real companies.
Okay?
So discounted payback period is better.
If you’re interested in learning this then you can check it out at MBAbullshit.com, on
our website.
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So take care and have a great day, okay, and good bye.
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Hope you enjoyed.
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