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Chapter 20. Building Discount Formulas > Exact Undiscounted Payback Point

Exact Undiscounted Payback Point

If the income generated by the asset is always received at the end of the period, your analysis of the payback period is done. However, many assets generate income throughout the period. In this case, the payback period tells you that some time within the period, the cumulative cash flows reaches 0. It might be useful to calculate exactly when during the period the payback occurs. Assuming that the income is received at regular intervals throughout the period, you can find the exact payback point by comparing how much is required to reach the payback with how much was earned during the payback period.

For example, suppose that the cumulative cash flow value was –$50,000 at the end of the previous period and that the asset generates $100,000 during the payback period. Assuming regular cash flow throughout the period, this means that the first $50,000 brought the cumulative cash flow to 0. Because this is half the amount earned in the payback period, you can say that the exact payback point occurred halfway through the period.


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