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- 1. Calculation of Payback Period with Microsoft Excel 2010 - Murali Subramanian
- 2. Introduction• Payback period is the time in which the initial cash outflow of investment is expected to be recovered from the cash inflows generated by the investment.• This presentation illustrates the method of calculating payback period with the aid of Excel functions of COUNTIF and HLOOKUP
- 3. Example• Let us consider an initial investment of Rs.1886 lakhs now (Year 0)• Let the net cash inflows through years 1 to 5 be: (Rs. Lakhs) Year 1 2 3 4 5 Net cash inflow -79 147 657 789 791 Cumulative cash inflow -79 68 725 1514 2305• We can see that the investment would be paid back in the 5th year. The payback period would be 4 years and 5.64 months. The fraction of the year is calculated as : (Investment – Cumulative Cash inflow in 4th year) = (1886 – 1514) Cash inflow in the 5th year 791
- 4. Using Microsoft Excel functions• Open a new spreadsheet• Enter the initial investment of 1886 in cell B1• Enter Year numbers 1 to 5 in cells B3 to F3• Enter the annual cash inflows through years 1 to 5 in cells B4 to F4• The cumulative cash inflows in years 1 to 5 can be computed in cells B5 to F5• Enter the formula =COUNTIF(B5:F5,"<"&B1) in cell B7. This will return the value 4, indicating the years• Enter the following formula in cell D7: =(B1- HLOOKUP(COUNTIF(B5:F5,"<"&B1),B3:F5,3,0))/(HLOOKUP(COUNTIF(B5:F5,"<"&B1) +1,B3:F5,2,0))*12 This will return the value 5.64, indicating the fraction of the 5th year in months
- 5. The spreadsheetHere is the spreadsheet as an embedded object. Investment 1886 (Rs. Lakhs) Year 1 2 3 4 5 Net cash inflow -79 147 657 789 791 Cumulative cash inflow -79 68 725 1514 2305 Payback period 4.00 yrs 5.64 months

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I am sorry Elena for this very late response. I am not sure if I have understood your question correctly. However I will try to explain the algorithm:

The key information that we are looking for is at what point in time does the cumulative cash flow exceeds the initial investment over a given time horizon.If in your case, the time horizon is only 4 years, then you will have to modify the ranges in the COUNTIF & HLOOKUP formulae.

Hope this explanation helps.