Definition
The payback period is the time needed to recover the original investment from the net cash flows generated by the project. It focuses on capital recovery and liquidity.
- Reflects investment risk and recovery speed
- Easy to calculate and understand
- Ignores profit after recovery
Calculation
With a total investment of three crore and an annual cash flow of seventy lakh, the payback period is found by dividing the investment by the yearly return.
- Investment amount: three crore
- Annual net cash flow: seventy lakh
- Estimated payback period: four years and three months
Key Insights
A shorter payback period improves confidence in the project. It is especially helpful in industries with changing market conditions or high initial costs.
- Indicates time for full cost recovery
- Helps prioritize quicker-return investments
- Useful in early-stage financial planning