Investments and payback time.
Payback time is often used to determine the attractiveness of an investment. Payback time is
- the number of periods required for cumulative benefits to equal cumulative costs
In general - the smaller the payback period, the better the investment.
Undiscounted payback can be expressed as
F0 = F1 + F2 + ... + Fnp (1)
F0 - (F1 + F2 + ... + Fnp) = 0
F0 = initial investment
F1 .. = cash flows in future periods
np = period where initial investment equals accumulated future cash flows
Discounted payback can be expressed as
F0 = F1 / (1 + i) + F2 / (1 + i)2 + ... + Fnp / (1 + i)np (2)
F0 - [F1 / (1 + i) + F2 / (1 + i)2 + ... + Fnp / (1 + i)np] = 0
i = interest rate