The Payoff Period and the Rate of Profit

The major conclusions reached by the analysis may be summarized as follows: First, the reciprocal of the payoff period is in fact an estimate of a proposal's rate of profit. Second, when a proposal's life is greater than its postlax payoff period , the reciprocal of the payoff period provides the best short-cut estimate of its rate of profit; and, when a proposal's life is less than its postlax payoff period , the average investment formula provides the better short-cut estimate of its rate of profit. The error in the two formulas is found by comparing them with present-value formula, which provides a proposal's true rate of profit. The third conclusion is that the Terborgh formula provides an index of the profitability of an investment proposal that has serious limitations in the purpose for which it is intended.