Payback Period

How long does it take the project to "pay back" the associated costs? For example, the AXZ Project will cost the organization $500,000 to create over five years. The expected cash inflow (income) on the project deliverable, however, is $40,000 per quarter. From here, it's simple math: 500,000 divided by $40,000 is 12.5 quarters, or a little over three years to recoup the expenses.

This selection method, while one of the simplest, is also the weakest. Why? The cash inflows are not discounted against the time to begin creating the cash. This is the time value of money. The $40,000 per quarter five years from now is worth less than $40,000 in your pocket today. Remember when sodas were a nickel? It's the same idea—the soda hasn't gotten better, the nickel is just worth less today than it was way back then.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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