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The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: produce a positive annual cash flow.
Payback can be defined as returning the investment equal to the original capital outlay. Payback can simply be said to pay back or get back the initial investment. The payback period is the specific time period required to recover the original cash investment. For businesses a payback period of 1 year is average, 6 months is Better and 1 month is good. Using the payback period we can calculate the risk involved in investment.
The payback period can be expressed in years or fractions of years. The formula to calculate the payback period is,
Payback period = Initial or original investment / Cash flow per year
Consider an example, a businessman invested $ 40000 with an annual payback of $ 2000. The payback period is calculated as $ 40000 / $ 2000. Then the payback period is 20 years. Hence, the payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to recoup its original or initial investment.
To know more about the Payback period refer to:
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