The payback period method provides an ROI answer from a time perspective, in the form of months or years.
The payback period calculation determines how long it will take to make enough money to offset the cost of the project or initiative. I find that this method works well with small, fast investment projects. Especially those that are saving money.
To calculate the payback period, start with the estimated cost and timing of the investment.
Then the benefits are calculated. The benefits could be money that’s saved or new revenue that’s generated.
An example of savings would be an investment in solar panels for the roof of the building to save on utility costs. While an example of new revenue would be an investment in an Atlanta office to generate new business.
Whether it’s savings or revenue, the benefit is usually described as an amount of dollars per month or year.
Next, add up all of the investment costs.
Lastly, add the benefits month-by-month or year-by-year until the total of the benefits equals the total of the investment. The shorter the payback time, the better the investment.
The point in time in which they are equal determines the payback period.