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What to create	Lesson plan
Which subject	Business
What topic	Payback
What length (min)	30
What age group	Doesn't matter
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Lesson Plan: Payback in Business

Duration

30 minutes

Academic Subject

Business

Lesson Objectives

By the end of this lesson, students will be able to:

1. Define the concept of payback in business.
2. Understand the importance of payback in investment decisions.
3. Calculate the payback period of an investment.
4. Discuss the advantages and disadvantages of using the payback method.

Materials Needed

• Whiteboard and markers
• Projector and screen (for presentation slides)
• Handouts with examples and exercises
• Calculator (optional)

Lesson Outline

Introduction (5 minutes)

• Begin with a brief discussion about investments and why businesses decide to invest in new projects or equipment.
• Introduce the concept of payback and its relevance in business finance, focusing on how it helps assess the feasibility of investments.

What is Payback? (10 minutes)

• Definition: Explain that the payback period is the time it takes for an investment to generate an amount of income or cash equivalent to the initial cost of the investment.

• Formula: [ \text{Payback Period} = \text{Initial Investment} / \text{Annual Cash Inflow} ]

• Use a simple example:

  • If a business invests $10,000 in a project that is expected to yield $2,500 per year, the payback period would be: [ \$10,000 / \$2,500 = 4 \text{ years} ]

Importance of Payback (5 minutes)

• Discuss the significance of payback in decision-making:
  • Provides a quick assessment of risk.
  • Helps businesses prioritize projects based on liquidity needs.
  • Acts as a preliminary filter before more detailed financial analyses are conducted.

Advantages and Disadvantages (5 minutes)

• Advantages:

  • Simple to understand and calculate.
  • Focuses on cash flow.

• Disadvantages:

  • Ignores the time value of money.
  • Overlooks cash flows that occur after the payback period.
  • Might prioritize shorter-term over potentially more profitable long-term investments.

Calculating Payback Period (5 minutes)

• Provide the students with a new scenario:

  • An investment of $15,000 that generates cash inflows of $5,000 in the first year, $7,000 in the second year, and $8,000 in the third year.

• Work through the calculations:

  • Year 1: $5,000 (Cumulative: $5,000)
  • Year 2: $7,000 (Cumulative: $12,000)
  • Year 3: $8,000 (Cumulative: $20,000)

• Determine how long it takes to recover the initial investment of $15,000.

Class Exercise (5 minutes)

• Hand out a worksheet with a scenario where students need to calculate the payback period for two different investments.

• Allow students to work individually or in pairs to complete the calculations.

Conclusion (5 minutes)

• Recap the definition of payback and its importance in business.
• Invite students to share their findings from the class exercise.
• Encourage students to consider how the payback method fits into broader investment analysis tools, such as NPV and IRR.

Assessment

• Students will be assessed based on their participation in the class exercise and their ability to calculate the payback period correctly on the worksheet.

Further Reading/Resources

• “Principles of Corporate Finance” by Richard A. Brealey and Stewart C. Myers.
• Online calculators and tutorials on payback period analysis.

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This lesson plan provides a structured approach to teaching the concept of payback in business and allows students to engage with the material through examples and exercises, catering to various learning styles.