Listen to a Business English Dialogue About Payback period
Emily: Hi Hannah, have you ever heard of the payback period in finance?
Hannah: No, I haven’t. What is it?
Emily: It’s a simple way to measure how long it takes for an investment to pay for itself. It tells you how many years it takes to recoup the initial investment through the cash flows it generates.
Hannah: Oh, I see. So, it’s like figuring out when you’ll start making a profit?
Emily: Exactly! It’s commonly used to evaluate the feasibility of projects or investments by comparing their payback periods to see which one pays back sooner.
Hannah: Are there any drawbacks to using the payback period as a measure?
Emily: Well, it doesn’t take into account the time value of money, meaning it doesn’t consider the fact that money received in the future is worth less than money received today.
Hannah: That’s important to consider. Are there any other metrics used alongside the payback period?
Emily: Yes, some businesses also use metrics like the net present value (NPV) or internal rate of return (IRR) to get a more comprehensive view of an investment’s profitability.
Hannah: How do you calculate the payback period?
Emily: You simply divide the initial investment by the annual cash inflows generated by the investment until the initial investment is recovered.
Hannah: Thanks for explaining, Emily. The payback period sounds like a useful tool for making investment decisions.
Emily: You’re welcome, Hannah. It’s a handy metric for quickly assessing the risk and return of different investment opportunities.