In an increasingly competitive market, investing wisely and safely is essential to keeping the textile industry productive and financially healthy.
Before allocating resources to new equipment or technologies, it is crucial to clearly assess the expected return on that investment.
This is where payback becomes a valuable strategic indicator, especially when the goal is to reduce risks and make data-driven decisions.
With that in mind, this content brings together everything you need to know about this metric. Keep reading to find out more!
Shall we begin?
What Is Payback?
Payback is a financial indicator that measures the time required to recover an investment. In other words, it identifies the period during which the invested amount will be recouped through profits or cash flows generated by the asset.
As such, it is an important strategic tool for industries that need to make assertive, financially sound decisions. It helps determine where to invest with lower risk and greater short-term return potential.
How to Calculate Payback?
Payback is a relatively simple return indicator to calculate and monitor. However, there are two main approaches to its calculation, each with specific purposes:
1. Simple Payback
Simple payback does not take into account variables beyond the investment amount and the expected returns in that period. In other words, you just need to follow this formula:
>> Payback = Initial Investment / Gains in the Period
It’s worth noting that “Gains in the Period” can also be calculated from savings generated or average cash flow.
The result will show the time (in months) needed to recover the investment, without accounting for profit, simply the point when the investment pays for itself. If you want the result in years, divide the number by 12.
Let’s consider a textile company that invested $120,000 in the purchase of a new automated cutting machine. This new asset is expected to generate monthly savings of about $10,000 due to reduced fabric waste, less rework, and improved textile production efficiency.
Applying the formula:
- Payback = Initial Investment / Monthly Savings
- Payback = 120,000 / 10,000
- Payback = 12 months
This means the investment will be fully recovered in 12 months.
2. Discounted Payback
The discounted payback method takes into account factors that influence the value of money over time, such as inflation.
So, the first step is to identify the Net Present Value (NPV) of each cash flow using the following formula:
>> NPV = CF / (1 + DR)^t
Where:
- CF: Cash flow in the period.
- DR: Discount Rate (often the SELIC interest rate).
- t: Time period (year, month, etc.).
Once you get the NPV, apply it in the formula below:
>> Discounted Payback = Initial Investment / NPV
Now consider a textile company that invested $80,000 in a machine to automate part of the dyeing process. It’s expected to generate $30,000 in savings in the first year.
To calculate the payback, the company uses a discount rate (DR) of 10% per year, based on the SELIC rate.
Calculation:
- NPV = 30,000 / (1 + 0.10)^1
- NPV = 30,000 / 1.10
- NPV = 27,273
Then:
- Discounted Payback = 80,000 / 27,273
- Discounted Payback = 2.93 years
When Is a Payback Considered Good?
The shorter the payback period, the faster the investment is recovered, reducing risks and freeing up resources for new investments.
Another useful comparison is whether the payback is shorter than the asset’s useful life. This ensures the investment is recovered before the asset needs replacement, allowing it to generate profits for a longer period.
When Should You Use Payback in the Industry?
Payback should not be seen only as a post-acquisition tool. It can and should be used at various stages of the buying journey.
For example, it helps to:
- Assess the feasibility of a purchase.
- Compare investment alternatives.
- Understand how to reduce risk.
- Get investment approval from management.
- Justify the purchase due to process improvements and increased efficiency.
In the textile sector, which is highly competitive, making decisions based on reliable performance indicators is critical.
In this scenario, payback becomes a valuable ally, helping secure faster returns, allocate resources more wisely, and boost the industry’s competitiveness.
What’s the Difference Between Payback and Other Indicators?
Payback and ROI (Return on Investment) are often compared and sometimes confused. Although they may seem similar, each serves a different purpose.
Here’s a summary of the main financial indicators and their differences:
| Indicator | Goal | What it Measures | Advantages | Limitations |
| Payback | Measure the time needed to recover an investment | Time to recover investment | Simple and easy to understand | Ignores returns after breakeven |
| ROI (Return on Investment) | Assess investment profitability | Percentage of profit relative to investment | Easy comparison between projects | Doesn’t consider how long it takes to recover |
| NPV (Net Present Value) | Determine present value based on future cash flows | Money value updated to the present | Accounts for time value of money and discount rate | Requires well-structured financial projections |
| IRR (Internal Rate of Return) | Calculate the project’s rate of return | Annual return percentage of the investment | Considers all cash flows over time | Can be hard to interpret with multiple positive/negative flows |
What Now?
If your company is considering investing in new textile machines, understanding payback is essential. Beyond knowing when the investment will be recovered, it’s important to analyze how the technology can optimize processes, reduce textile waste, and boost efficiency.
By combining innovation with strategic financial analysis, you’ll be better positioned to make safer decisions with higher return potential and gain a competitive edge.
Download our free eBook and discover how to get better returns with the right textile technology!
