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How does a higher residual value impact on both: dynamic payback period and static payback period?...

How does a higher residual value impact on both: dynamic payback period and static payback period? (Increase, Decrease or N.A.)

Please explain thoroughly. Thanks a lot in Advance.

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Answer #1

Residual value does not have any impact on either of the dynamic payback period or static payback period.

Static payback periods calculate the number of years required to recover the initial capital invested whereas, dynamic payback period takes in to account the time value of money concept and measures the number of years required to recover the same.

Residual value is the scrap value of any investment at the end of its useful life and thus it is the cash inflow which would happen at the end of the life of an asset when it is sold.

Now, according to the explanation above, cash inflow from the salvage value for both types of payback period happens after the capital invested has been recovered. Thus, the residual value would not have any impact on the payback period calculated.

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