PAYBACK ANALYSIS

Payback analysis is simply determining the number of years that it takes for a new product, service, and so forth, to accumulate earnings to pay for itself.

There are, of course, a number of variables that affect the payback period of a new product or service. These include taxes, fees, and so on, and should be accounted for when determining the payback period.

The benefit of payback analysis is determining which new variety of product or service offers the greatest return to offset investment and implementation costs. It also facilitates deciding whether to proceed.

for Determining Payback Analysis

• Exactly define the new product, service, and so on.
• Calculate its cumulative cost.
• Perform a breakeven analysis.
• Determine the payback period by using the following formula:

  

• For each alternative for a new product, service, and so on, calculate the expected annual rate of return.
• Draw a matrix to reflect the varying rates of return for each alternative.
  • Note: Decide whether to deduct taxes, fees, and so on, prior to calculation.
• Select the alternative that offers the most desirable rate of return.