Excel is a powerful software. We can perform numerous operations on our datasets using excel tools and features. There are many default Excel Functions that we can use to create formulas. Many banks and other financial institutions use excel files to store important data. They need to calculate various outputs and it’s easier to do that in excel. This article will show you the step-by-step procedures to Calculate Payback Period in Excel.
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Download the following template to practice by yourself.
Step by Step Procedures to Calculate Payback Period in Excel
The length of time (Years/Months) needed to recover the initial capital back from an investment is called the Payback Period. This is a capital budgeting term. A shorter payback period is more lucrative in the case of investments contrary to more extended payback periods. After-tax cash flows are taken into consideration only for the calculation of payback periods. Now, go through the steps below carefully to Calculate Payback Period in Excel.
STEP 1: Input Data in Excel
- First, we have to input data.
- In this example, we’ll type Cash Inflows and Cash Outflows of 6 years.
- See the picture below.
Read More: How to Calculate Payback Period with Uneven Cash Flows
STEP 2: Calculate Net Cash Flow
- Here, we’ll calculate the net/cumulative cash flow.
- For this reason, select cell E5.
- Then, type the formula:
- Subsequently, press Enter.
- After that, use AutoFill to complete the rest.
Read More: How to Calculate Operating Cash Flow in Excel (2 Easy Ways)
STEP 3: Determine Break-Even Point
The point of no profit and no loss is the break-even point. We obtain the break-even point of a project when the net cash flows exceed the initial investment. So, learn the process to determine the break-even point.
- Firstly, select cell D12.
- Insert the formula:
- The COUNTIF function counts the number of years where the net cash flow is negative.
- Consequently, press Enter to get the break-even point.
Read More: How to Create Cash Flow Statement Format in Excel
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STEP 4: Retrieve Last Negative Cash Flow
If our dataset is large, we won’t be able to find the last negative cash flow manually. We’ll use the VLOOKUP function to retrieve that value easily.
- For that purpose, click cell D13.
- Here, input the formula:
=VLOOKUP(D12, B5:E10, 4)
- Afterward, press Enter.
Read More: Create Cash Flow Statement Format Using Direct Method in Excel
STEP 5: Find Cash Flow in Next Year
Similarly, we’ll look for the cash flow (In) which we have after that last negative cash flow.
- Choose cell D14.
- Type the formula:
=VLOOKUP(D12+1, B5:E10, 2)
- Hence, press Enter to return the result.
Read More: Create Cash Flow Statement Format with Indirect Method in Excel
STEP 6: Compute Fraction Year Value
We’ll insert the ABS function as the fractional value of a year can’t be negative.
- First of all, select cell D15.
- Then, insert the formula:
- Subsequently, press Enter.
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STEP 7: Calculate Payback Period
Finally, we’ll calculate the payback period.
- In this regard, click cell D16.
- Now, type the formula:
=D12 + D15
- Next, press Enter.
- Thus, you’ll get the accurate payback period in years.
- However, it can be confusing to see 25 years as a year should be an integer value.
- To convert it to months, in cell D17, input the formula:
- Lastly, press Enter to get the output in months format.
STEP 8: Insert Excel Chart to Get Payback Period
Moreover, we can insert charts to get the Payback Period.
- Choose the ranges B5:B10 and E5:E10 at first.
- Now, go to Insert ➤ Line Chart ➤ 2-D Line Chart with Markers.
- As a result, it’ll return a line chart as shown below.
- In that chart, you’ll see the approximate value where it crosses the X-axis.
- That is the payback period.
- But with this chart, we can’t get the exact value as we have shown earlier.
Therefore, our Payback Period calculating template in Excel is ready to demonstrate. Look at the following picture where our final output is displayed.
Henceforth, you will be able to Calculate Payback Period in Excel following the above-described procedures. Keep using them and let us know if you have more ways to do the task. Follow the ExcelDemy website for more articles like this. Don’t forget to drop comments, suggestions, or queries if you have any in the comment section below.
Hello, the computation of the fraction year value doesn’t work if the first positive CF has a smaller absolute value than the last negative CF. How do I adjust the formula?