Payback period

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payback period

[′pā‚bak ‚pir·ē·əd]
(industrial engineering)
The amount of time required for achieving an amount in profits to offset the cost of a capital expenditure, such as the cost of investment in modifications in an industrial facility for the purpose of conserving energy.

Payback period

A popular nondiscounting project selection technique used when organizations require the capital investment of a project to be recovered within a specified period; the period it takes for the stream of net cash flows to equal the initial investment. Also, a term used in the evaluation of sustainable and renewable energy options, wherein greenhouse or greenhouse intensive energy savings that the technology may enable over its useful life are assessed in relation to the embodied energy required for its manufacture. For renewable energy systems, it can also refer to the period of time over which energy cost savings derived from accessing renewable energy offset the upfront capital costs of the system.
References in periodicals archive ?
It is interesting to note that the second most popular technique is the payback method.
study by Haley and Goldberg (1995) found that although reliance on the payback method stifled strategic investments, reliance on net present value (NPV) did not.
There are three commonly used methods of evaluating capital expenditures: the payback method (PB), the internal rate of return method (IRR), and the net present value approach (NPV).
If we use the traditional payback method without considering the time value of money, the payback period will be $2000/$17.
For example 86 per cent of those organizations which "often" or "always" used the payback method combined it with a discounting method and 94 per [TABULAR DATA FOR TABLE I OMITTED] [TABULAR DATA FOR TABLE II OMITTED] [TABULAR DATA FOR TABLE III OMITTED] cent of those firms "often"/"always" using the accounting rate of return also combined it with a discounting method.
6 per cent of firms in the sample claimed to use the payback method, falling to 33.
Most financial experts agree the most appropriate way to evaluate cost effectiveness is by using the net present value method rather than the internal rate of return or the payback method of analysis.
The payback method is an ad hoe rule that looks at how quickly a project pays back the initial investment.
The accuracy of the simply payback method worsens as time periods become longer because the method does not take into account either the time value of money or the service life of the project.