Pay-off period rate of return

Pay-off period rate of return

Using the calculations from Simple Investment Stream, the number of years necessary to recoup the initial investment in the projected scenario is between 9 and 10, or more precisely, 9.02 years, in it's 10th year of operation. Since 100 percent is paid off in 9.02 years, the average is

• 100% / 9.02 years = 11.09 %/year

The pay-off period rate of return equals 11.09 percent per year, reflecting the long time it takes for the initial investment and subsequent re-investment to be paid off.

The revised scenario takes about 8.61 years to recoup the initial investment, which occurs in it's 9th year of operation. The average is

• 100% / 8.61 years = 11.61 %/year

This method of calculation favors projects which are short-term. Using the example of lightbulbs from ((Internal rate of return, IRR)), a flourescent lightbulb would cost 39 DKK more than an incandescent lightbulb, but save 137.4 DKK annually, both from lower energy usage and from lack of replacement. This means the additional costs of the flourescent lightbulb is repaid in less than a year, namely 3.4 months. This is equivalent to:

• 100% / 0.284 years = 351.8 %/year

So the pay-off period rate of return equals 351.8 percent per year. The above calculations clearly illustrate that this method is only useful for weighing the rate at which the initial investment is paid off.