Payback Period

The payback period is the time it takes for an investment to generate enough cash flows to recover its initial cost. It is a simple method for evaluating the profitability of an investment or project, particularly in capital budgeting. A shorter payback period is generally preferred, as it indicates that the investment will quickly recoup its cost. However, the payback period does not consider the time value of money or cash flows beyond the recovery point.

Example

A company invests $100,000 in new machinery that generates $25,000 in annual cash flows. The payback period is four years, as the investment is fully recovered in that time.