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3. Simple Cash Payback
The Simple Cash Payback method assesses how long it will take for an investor to recoup their investment based on the business’s projected cash flows. The quicker the payback period, the less risky the investment is perceived to be. While straightforward, this method doesn’t consider the time value of money, potentially underestimating the investment’s risk.
The ‘Simple Cash Payback’ method is a basic tool to determine the payback period of an investment. It does not factor in the time value of money, future cash flows beyond the payback period, or the profitability of the investment after the payback period has been reached.
The table below provides an explanation and an example of the input variable related to the ‘Simple Cash Payback’ method:
| Input Variable | Explanation | Example |
| Years to Recoup Investment | This variable denotes the period in which the initial investment will be recovered solely from the cash inflows generated from that investment. It gives an idea of how quickly the investor will get back the money invested without considering the time value of money. | If a business invests £100,000 in a new venture and expects annual cash inflows of £25,000 from it, the years to recoup the investment would be 4 years (£100,000 ÷ £25,000). |
