Payback Period

The payback period is the length of time it takes an investor or a business to recoup. The payback period is calculated by taking annual cash flows and seeing how many years it takes for them to equal the initial investment. Shorter payback periods can be preferable to businesses and investors, although the length of time it takes to recoup an initial investment doesn’t necessarily mean it is the most profitable project option on a long-term basis. It is also seen as a somewhat facile metric as it doesn’t take into account the time value of money in the same way as net present value does using discount formulas.