PAYBACK METHOD

The payback method in capital budgeting is a technique used to determine the date when a project is expected to payback the original invested funds. 

The payback date can be either based on undiscounted cash flows (the original cash flow estimates) or on discounted cash flows (the present value of the original cash flows).

The timing of the cash flows, after year zero, are assumed to be "straight line" receipt of cash through out the calendar year (as opposed to lump sum receipts at the end of each year, as assumed by the NPV/DCF and IRR* models).

Steps in calculating payback date:
1.  Calculate "cumulative cash flows", or the net of all cash flows through a certain date.
2.  Determine the "breakeven year", the first year with a positive "cumulative cash flow".
3.  Divide the "absolute value of the cumulative cash flow flow for the year before the breakeven year " by the cash flow for the breakeven year.  This is the percentage of the year at which the project will breakeven.
4.  Multiply the above percentage by 365 days.
5.  Look up that day on a "Julian calendar".