What is Payback

The return on investment (Payback) is an  indicator of the return time of an investment. This is the period that the company will take to return the money invested in a new project or investment to its coffers.

It is crucial information when determining the option to invest, acting as an indicator of risk. When calculating the refund, the manager considers not only future earnings, but also the time to obtain the values ​​and the amount to be withdrawn from the tellers. Thus configuring itself as a decision-making method, in which the manager can compare projects and investments and allocate his resources in a more productive way based on the return on investment.

There are two ways to calculate payback, one by the number of years or months it will take the money invested to make a profit, the simple payback. And the other is similar, but considers a discount rate of the securities taking into account the period, this being the amortization with a discount.

Simple payback

Simple recovery is monitoring the accumulated cash flow. The amount recorded in the cash flow period, that is, the result of income minus expenses, and how many accounting periods are necessary for the cash flow to be zero, that is, balanced. This is the time of recovery, when income finally equals or exceeds expenses and the investment made is paid properly.

For example, an industry invests R $ 1 million in new machinery. Considering its cash flow, between income and expenses, and considering the projected profit with the production increase generated, it is assumed that in three years the company recovers the amount invested. In other words, the payback on this investment in new machines is three years.