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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