Payback period = investment costs / cash flow per year (revenue-costs) = how many years you need to get back what you invested
Break-even in years = fixed costs = (revenues - variable costs) = at what year you will achieve 0 profits
- Imagine you want to open an ice cream shop
- Initial investment is 50 k EUR
- revenue is 10 k in Year 1, 20 k in Year 2, 30 k in Year 3, 40 k in Year 4 and 50 k in Year 5
- Fixed costs are 10 k and variable costs are 20 k per year
Break-even in years you will achieve in Year 3 (revenues - variable costs = 10 k which is equal 10 k in fixed costs) – so you will arrive to 0 in terms of your profits
Payback period you will achieve in Year 5 (to be precise in 4,8 years) because in Year 3 you will have already 80 k EUR cumulative loss (investment + costs loss), in Year 4 you will have 40 k cumulative EUR loss, and in Year 5 you will have 10 k EUR cumulative profit.