In this article, we’re going to talk about how to use the payback method when the payback period is not an integer. For example, let’s say it’s **2.4 years** or **2.7 years **something like that so let’s jump into an example let’s say that

There’s a firm that has a required payback period for this type of project of **3 years** okay so if the project hasn’t recouped its initial investment within **3 years** then we’re not going to accept that project right? So the initial investment for this project let’s call it to project **“A”** is **$80,000.** So we’re going to forecast the cash flows for project “A” and if we don’t get at least** $80,000** within **3 years** if this project doesn’t pay for itself that **$80,000** within **3 years** and if we can’t** break even **then we’re going to** reject **project **“A”.**

So then the question is we have to calculate the payback period of this project how quickly does this project pay itself back? So we’re going to look that in **year 1 **this project has a cash flow of **$30,000** that we’re receiving and then in **year 2** it’s **$40,000** so we see that between **year 1** and **year2** we’re receiving a total of **$70,000.** Now if you remember we put up** $80,000,** so the project hasn’t quite paid for itself yet, we’re still** $10,000** short but when you look at** year 3** we’re receiving** $50,000** and we were just **$10,000** short, so we’re definitely going to have this project pay itself back sometime **during year 3.**

But if somebody were to ask you what is the actual payback period? How quickly does this project pay itself back? We know that the answer is going to be somewhere between **2 and 3 years.** The question is how do we calculate?

So we see that we are **10,000** short where it’s coming into **year 3.** I got that by taking the **80,000** upfront invested minus the **70,000.** We received it in the first **2 years,** right? So let’s look at this **50,000** we receive in **year 3** what we’re going to do is we’re going to take the **10,000** which we need to break even as of year three **10,000** and divide it by the **50,000** that we receive in year three okay so that’s going to give us** 0.2**

and so we’re going to see that the actual payback period for this project is going to be **2.2 years.** I got that by just saying look “we know it’s going to take these **2 years** right? and we know it’s not going to take the full **3 years** because we actually end up getting **$120,000** if you add up all three years right?” So it’s going to pay itself back sometime in this** year 2** and when we’re actually taking the ten thousand divided by fifty thousand. We’re basically saying “Okay it’s taking about one-fifth of the year” so you could even say two and one-fifth years right? That’s equivalent to saying** 2.2** so if somebody were to ask you like the manager says look how quickly does project pay itself back we would say **2.2 years.**