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Payout time (POT)

payback period is the period of time required for the profit or other benefits of an investment to equal the cost of the investment.

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Payout time (POT)

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  1. PAYOUT TIME PREPARED BY ABDULMAGEED SALH ELJABRI 02108050

  2. OUTLINES • Definition of Payout Time • The uses of POT • Decision rule with POT • The calculation of POT • Some important points • Conclusion

  3. Definition • Payout Time (Payback Period): is the period of time required for the profit or other benefits of an investment to equal the cost of the investment. • or it's the time from committing first investment until the cumulative net cash flow (CNCF) becomes zero and remain above the zero.

  4. Definition

  5. The uses of POT • As a profit indicator. present value of future money profit to investment ratio internal rate of return • To compare between Alternatives.

  6. Decision rule with POT • An investment is accepted (rejected), if payback period < (>) some specified number of time period. • The cutoff is arbitrarily chosen by the manager or the entrepreneur. • If POT > cutoff • If POT < cutoff rejected accepted

  7. The calculation of POT • Payback period is usually expressed in years. • Start by calculating Net Cash Flow for each year: Net Cash Flow Year 1 = Cash Inflow Year 1 - Cash Outflow Year 1. • Then Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3 ... etc.) • Accumulate by time until Cumulative Cash Flow is equal zero: that timeis the payback time.

  8. The calculation of POT Example POT= 5.37 year

  9. The calculation of POT • compare between Alternatives: Project A Project B POT(A)= 2.9 year POT(B)= 3.2 year

  10. This is an approximate economic analysis calculation. Some important points • important points to be understood about payback period calculations: • All the economic consequences beyond the POT are completely ignored.

  11. Some important points • we will use Profit to Investment ratio (PIR) to compare between alternatives in last example. Project A PIR = = 0.5 $/$ Project B PIR = = 1.6 $/$

  12. Conclusion • May select the wrong alternative Payout time is a profit indicator It is an approximate calculation but easy Do not rely on a single indicator to determine the profitability of the project

  13. I hope that my presentation was useful for you and thank you for your attention

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