The payback period refers to the time needed to recover an investment.
The breakeven point refers to the situation where total revenues are equal to total costs. The question is normally related to the quantity required to reach that point.
Let’s say that you have the following:
I = Initial investment
CF = Yearly cash flow of the investment
Assume for simplicity that the yearly cash flow is constant and there is no time value of money.
The payback period would be :
Payback period = I / CF
If the cash flow is not constant or there is time value of money, the formula becomes more complex, due to the fact the cash flow changes every year.
Let’s assume your goal is to find the quantity to reach breakeven.
You can just rearrange the breakeven formula, which is the following:
- R= Revenues
- VC= Variable Costs
- FC = Fixed Costs
- p = Price
- q = Quantity
- c = Variable Cost per Unit
To calculate the quantity, you can rearrange it as follows:
Hope this helps,