1. Using Payback Period
So another common metric which gets used to evaluate investments is the
payback period. Now, we can define the payback period as "A technique,
which measures exactly how long it takes the company to recover or recoup
the capital its invested in a project". So for example, you could have
a payback period of three years, which would mean that it would take
three years in order to get back all the capital which was invested.
Now, another common metric is the discounted payback period, so this is
the same as the payback period, but it accounts for the time value
of money. And one thing to keep in mind at the bottom here
is that these techniques, the issue with them is that they do not
measure at all what happens after the payback period, they only measure
up into and including the payback period itself.
Now, it's great to understand this theory, but let's jump into Excel next
and make sure that we know exactly how to tackle the challenge of
calculating the payback period using a real example.
2. Let's practice!