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