Explain an example of payback how to calculate.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Explain an example of payback how to calculate.
A payback period is the amount of time needed to earn back the cost of an investment. The length of time necessary for a payback period on an investment is strongly considered before selecting a project - because the longer this period happens to be, the longer this money is lost and the more it negatively it affects cash flow until the project breaks even, or begins to turn a profit.
A shorter payback period is considered better, since it means the investment’s risk level associated with the initial investment cost is only for a shorter period of time.
Formula for payback period calculation = Initial investment cost/ cash inflow for that period
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