Bailout Payback Method

Bailout Payback Method

See Also:
Capital Budgeting Method
Direct Method Allocation
Double Declining Method Depreciation
Internal Rate of Return Method
NPV vs Payback Method

Bailout Payback Method Definition

In accounting, bailout payback method shows the length of time required to repay the total initial investment through investment cash flows combined with salvage value. The shorter the payback period, the more attractive a company is.

Bailout Payback Calculation

For example, a company invested $20,000 for a project and expected $5,000 cash flow annually.
1. Payback period = 20,000 / 5,000 = 4
2. Bailout payback

At the end of year  Cash flow 	Salvage value	Cumulative payback
1	               5,000	   12,000               17,000
2	              10,000	   10,000               20,000
3	              15,000	    8,000               23,000
4	              20,000	    6,000               26,000

Bailout payback = 2, at the end of year 2, the cumulative payback of $20,000 is equal to the initial investment of $20,000.

Payback Period vs Bailout Payback

The second type of payback, bailout payback method, is similar like payback period method. The difference between these two is that bailout payback model incorporates the salvage value of the asset into the calculation and measures the length of the payback period when the periodic cash inflows are combined with the salvage value.
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