period

Examples of period in the following topics:

• Calculating the Payback Period

  • To calculate a more exact payback period: Payback Period = Amount to be initially invested / Estimated Annual Net Cash Inflow.
  • Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
  • Payback period is usually expressed in years.
  • The modified payback period algorithm may be applied then.
  • To be more detailed, the payback period would be: 4 + 2/7 = 4.29 year.

• Advantages of the Payback Method

  • Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
  • All else being equal, shorter payback periods are preferable to longer payback periods.
  • Although primarily a financial term, the concept of a payback period is occasionally extended to other uses, such as energy payback period (the period of time over which the energy savings of a project equal the amount of energy expended since project inception).
  • The payback period is an effective measure of investment risk.
  • The project with a shortest payback period has less risk than with the project with longer payback period.

• Calculating Values for Fractional Time Periods

  • Up to this point, we have implicitly assumed that the number of periods in question matches to a multiple of the compounding period.
  • Compounding periods can be any length of time, and the length of the period affects the rate at which interest accrues.
  • In this case, you need to find the amount of money that is actually in the account, so you round the number of periods down to the nearest whole number (assuming one period is the same as a compounding period; if not, round down to the nearest compounding period).
  • Even if interest compounds every period, and you are asked to find the balance at the 6.9999th period, you need to round down to 6.
  • The last time the account actually accrued interest was at period 6; the interest for period 7 has not yet been paid.

• Number of Periods

  • In , nrepresents the number of periods.
  • A period is just a general term for a length of time.
  • If one period is one month, the discount rate must be X% per month.
  • In compound interest, the interest in one period is also paid on all interest accrued in previous periods.
  • Define what a period is in terms of present value calculations

• Single-Period Investment

  • A period is a general block of time.
  • Usually, a period is one year.
  • The number of periods can be represented as either t or n.
  • Let's go through an example of a single-period investment.
  • Since this is a single-period investment, t (or n) is 1.

• Calculating Values for Different Durations of Compounding Periods

  • Sometimes, the units of the number of periods does not match the units in the interest rate.
  • For example, the interest rate could be 12% compounded monthly, but one period is one year.
  • This atom will discuss how to handle different compounding periods.
  • The equation follows the same logic as the standard formula. r/n is simply the nominal interest per compounding period, and nt represents the total number of compounding periods.
  • The last tricky part of using these formulas is figuring out how many periods there are.

• Calculating the Cash Flow Cycle

  • =Inventory conversion period + Receivables conversion period – Payables conversion period
  • Receivables conversion period = Avg.
  • Payables conversion period = Avg.
  • We estimate its LEVEL "during the period in question" as the average of its levels in the two balance sheets that surround the period: (Lt1+Lt2)/2.
  • Payables conversion period: Rate = [inventory increase + COGS], since these are the items for the period that can increase "trade accounts payables" (i.e., the ones that grew its inventory).

• Disadvantages of the Payback Method

  • Payback period analysis ignores the time value of money and the value of cash flows in future periods.
  • An implicit assumption in the use of payback period is that returns to the investment continue after the payback period.
  • Payback period does not specify any required comparison to other investments or even to not making an investment.
  • The modified payback period algorithm may be applied then.
  • Then the cumulative positive cash flows are determined for each period.

• Multi-Period Investment

  • Multi-period investments are investments with more than one period, so n (or t) is greater than one.
  • Things get marginally more complicated when dealing with a multi-period investment.
  • The number of periods, however, is not 24--it is 2.
  • If the interest rate is written as "percent per year" your periods must also be measured in years.
  • If your periods are defined as "days", your interest rate must be written as "percent per day. "

• Annuities

  • An annuity is a type of investment in which regular payments are made over the course of multiple periods.
  • Since annuities, by definition, extend over multiple periods, there are different types of annuities based on when in the period the payments are made.
  • Annuity-due: Payments are made at the beginning of the period .
  • For example, if a period is one month, payments are made on the first of each month.
  • Ordinary Annuity: Payments are made at the end of the period .