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馃敶 How to Calculate Payback Period Formula in 6 min. (Basic) Tutorial Lesson Review - YouTube
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How to Calculate Payback Period Formula in
6 min.
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(Basic) Tutorial Lesson Review
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Okay and welcome back again to MBAbullshit.com.
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Alright?
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So our topic for this video is payback period,
alright?
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So the topic for this video is payback period.
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What is a payback period and how to find the
payback period?
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So remember you can go back MBAbullshit.com
for more help on lots of cool different business
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topics.
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Okay?
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So for example, okay for example, you invest
one hundred dollars on a business and the
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free cash flow or the earnings, okay?
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If you haven鈥檛 watched my video yet about
free cash flow, don鈥檛 worry.
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Imagine that free cash flow is similar to
income or profit or earnings, okay?
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So what if you invest one hundred dollars
in a business and you earn cash or cash flow
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of forty dollars in the first year, thirty
dollars in the second year, thirty dollars
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in the third year, twenty-four dollars in
the fourth, and fifteen dollars in the fifth
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year.
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Okay?
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When is your payback?
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Okay?
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When is your payback?
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How long is your payback period?
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Okay, to do this you need to do a special
step wherein you find out the collected accumulative
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or accumulated or total collected payback.
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Now how do you do that?
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It鈥檚 actually very simple.
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In year one, it鈥檚 the same.
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Okay?
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You earn forty dollars in year one so your
total collected payback is forty dollars.
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For year two, your collected payback is the
cash flow from year one plus the cash flow
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from year two.
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So that is seventy dollars.
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Okay?
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Forty plus thirty equals seventy.
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Alright?
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Now what is the collected payback in year
three?
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Well same thing forty plus thirty, forty in
the first year plus thirty in the second year
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plus thirty in the third year.
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So your collected payback over here is one
hundred dollars.
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Forty plus thirty plus thirty equals one hundred.
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Okay?
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You do the same thing in the forth year, okay?
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Forty plus thirty plus thirty plus twenty-four
equals one hundred twenty-four, and you do
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the same thing for the fifth year.
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Forty plus thirty plus thirty plus twenty-four
plus fifteen equals one hundred thirty-nine
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dollars.
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So the question now is when is your payback
period?
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Well, the important thing here is to look
at the collected payback column and not anymore
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the cash flow column, and you will find that
you already have payback here.
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Okay?
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At year three.
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Why?
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Because at year three, you already have one
hundred dollars which is the same as your
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one hundred dollar investment over there.
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Okay?
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So we can now say that your payback period
is three years.
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Why is it three years?
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Because you get your payback, okay, on year
three.
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So you get your payback in year three that
means your payback period is three years.
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Alright?
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So now why is this important?
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Why do we need to know the payback period
of an investment?
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Well it鈥檚 very simple.
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The rule of thumb or the basic rule of thumb
is that the shorter the payback period is
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then the better it is for you, okay?
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So if you鈥檙e a businessman then you want
a shorter payback period because that means
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that you get your money back faster.
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Okay?
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If you have a longer payback period then it
takes a longer time to get your money back.
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Okay?
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So now that you know the basic concept of
payback period, you are ready for our next
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video on discounted payback period which is
actually better for business students and
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is also better to use this in real companies.
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Okay?
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So discounted payback period is better.
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If you鈥檙e interested in learning this then
you can check it out at MBAbullshit.com, on
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our website.
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Alright.
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So take care and have a great day, okay, and
good bye.
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And remember to share if you like it, if you
like this video, if you learned something
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from it.
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On Twitter we are called MBAbullshit.
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That鈥檚 our nickname.
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On Facebook, just type in our website and
you鈥檒l find our fan page or simply forward
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our YouTube link on your email.
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Okay.
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Hope you enjoyed.
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