The term payback period is certainly familiar to those of you who have studied economics. This term is also often known as the payback period. So, simply payback period is a return on investment through profits or profits within a certain period of time.
This payback period is widely used by investors to be able to determine investment decision making, this decision will later be used as a determinant of investment in a project. In general, those investors are not too happy with investments that payback time is too long.
Well, in this article, let’s review in full about the payback period and how to calculate it properly.
Payback Period Is
So, the payback period is a period of time needed to return the capital funds that have been issued by investors. In Indonesia, the payback period in the business world is more often referred to as the payback period.
Businesses and investors more often use the payback period method in determining or making investment decisions, whether the company is worth investing in or not. For that, it takes an understanding of how to calculate the payback period itself.
If a company or project has a long enough payback period, it will become less attractive among business people or investors.
According to Experts, the Payback Period Is
So that we get to know more about the payback period, it helps us understand the meaning of the payback period based on the opinions of experts. The following is their opinion on the payback period.
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Dian Wijayanto
Dian Wijayanto explained that the payback period is a period needed to be able to return the funds that have been used in an investment.
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Abdul Choliq
Abdul Choliq has his own view regarding the payback period. According to him, the payback period is an estimate of the period of return on an investment that has been made with a profit earned.
Well, based on the theory that has been issued by the two experts above, we can understand how important it is to know the payback period for a project. So, if you intend to invest, then you can avoid various old payback projects because they will be less profitable.
Advantages of Payback Period
The following are various advantages of the payback period that can be obtained by an investor:
1. Knowing the Payback Period
Procurement on a project carried out by a company can be calculated easily from how long the business has been running from the beginning to the end of the project.
With this estimate, you can find out the range of time you need to be able to get back the capital you spent to be used as a project investment.
After that, you can make precise calculations regarding the completion of a project. This is very important to know so that you can calculate the period of time you really need to get your capital back.
2. Selecting a Project
The company may carry out more than one project. However, in carrying out the project, of course, it requires a large amount of capital or investment funds. So, if a company can carry out two types of projects, then you can do a comparison of the implementation of the two projects.
From these two types of projects, later you can get a definite idea which one is able to return your funds quickly, or which project is able to close the capital quickly.
Later, you can make this an alternative project choice for your company.
3. Easy and Simple
Basically, the payback period can be done and calculated with a simple formula. The most commonly used formula is investment value: investment per year.
By using this formula, you can get the payback period needed to be able to return the capital or investment funds you spent on a project. In addition, these calculations will also help you calculate the time you need to be able to get your capital back.
Calculations using these formulas are also easy to do and look simple, so they should be able to be done by everyone who is engaged in various types of businesses or businesses, be it small scale, medium scale, or large scale.
4. Considering All Risks
Some of you may be able to choose a project that may require a short payback period. To find out, you need a return on capital formula as we discussed in the previous point.
By using this calculation formula, you can choose a project that is more capable of returning funds in a short period of time. Why? Because after all, the speed of a project in completing its work will make the process of returning capital faster.
That means, the shorter the processing time, the less risk the company can accept. Because, if the payback period is getting shorter, then the company’s risk of being able to get a loss will also decrease.
With a short payback period, it will make investors or business owners to minimize losses.
Weakness of Payback Period
Everything that is organized by a company certainly has its advantages and disadvantages. It is the same with projects run by a company, with investments made by investors, the implementation process can be carried out properly.
However, one thing that must always be invested is that the capital funds that have been received by the company in the implementation effort are that project capital funds must always be returned. Do not let the company suffer losses due to the implementation of the project.
Therefore, you must be able to calculate the payback period so as not to make various mistakes in predicting a return on investment capital.
However, the calculation of the payback period still has certain drawbacks. With the calculation of the payback period, you will focus more on returning your capital or investment, while there are other things that you ignore.
In fact, you might even forget the various investment support costs that you should also calculate.
This form of negligence is actually able to make the company suffer losses even though it may not be too much. So, during the process of returning capital, the company may experience problems due to investment support costs that were not previously taken into account.
In addition, the payback period is also used only to calculate the length of the payback period. The calculations in it do not include profits or profits that may be received by investors.
Indicator Payback Period
- If the payback period is faster than the specified time, then the company is eligible for an injection of funds.
- If the payback period is longer or even exceeds the specified time, then the project is not feasible to invest or inject funds.
- If the company has more than one project, then choose a project that has a faster payback period.
How to Calculate Payback Period
Payback period time or payback period can be calculated by dividing an investment value by the net cash flow that comes in every year.
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Rumus Payback Period
The formula that you can use to calculate the payback period time is as follows:
Payback Period = Investment Value: Net Cash In
Note: This formula assumes that the net cash inflows are valued the same at each time period or the same in each year.
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Examples of Payback Period Calculation Cases
Management at PT ABC is considering buying production equipment for electronic components. With the purchase of a production machine that costs IDR 250 million, the net profit that can be obtained from the additional machine is IDR 70 per year. So, what is the payback period time for this machine?
Answer:
Investment Value = Rs. 250,000,000,-
Net Cash In = Rs. 70,000,000,-
payback period = ?
payback period = Investment Value : Net Cash In
payback period = Rs. 250,000,000,- : Rs. 70,000,000,-
payback period = 3.57
Based on the above calculation, the payback period or payback period for a production machine is 3.57 years.