DEFINITION of 'Payback Period'
The length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.
Calculated as:
Payback Period = Cost of Project / Annual Cash Inflows
VIDEO
BREAKING DOWN 'Payback Period'
All other things being equal, the better investment is the one with the shorter payback period. For example, if a project costs $100,000 and is expected to return $20,000 annually, the payback period will be $100,000/$20,000, or five years. There are two main problems with the payback period method:1. It ignores any benefits that occur after the payback period and, therefore, does not measure profitability.
2. It ignores the time value of money.
Because of these reasons, other methods of capital budgeting, like net present value, internal rate of return or discounted cash flow, are generally preferred.

Discounted Cash Flow (DCF)
Discounted cash flow (DCF) is a valuation method used to estimate ... 
Internal Rate Of Return  IRR
A metric used in capital budgeting measuring the profitability ... 
Net Present Value  NPV
Net Present Value (NPV) is the difference between the present ... 
Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
PEG Payback Period
A key ratio that is used to determine the time it would take ... 
Capital Budgeting
The process in which a business determines whether projects such ...

Investing
Payback Period
Payback period is the time it takes for an investment to generate an amount of income or cash equal to the cost of the investment. The shorter the payback period, the better the investment is ... 
Fundamental Analysis
Discounted Cash Flow Analysis
Find out how analysts determine the fair value of a company with this stepbystep tutorial and learn how to evaluate an investment's attractiveness for yourself. 
Credit & Loans
How Mortgage Refinancing Affects Your Net Worth
Find out how to determine whether refinancing will put you ahead or even more behind. 
Investing Basics
Understanding The Time Value Of Money
Find out why time really is money by learning to calculate present and future value. 
Markets
Intangible Assets Provide Real Value To Stocks
Intangible assets don't appear on balance sheets, but they're crucial to judging a company's value. 
Active Trading
FYI On ROI: A Guide To Calculating Return On Investment
Return on investment is a simple equation that can give you an edge when finetuning your portfolio  here's how to use it. 
Forex Education
Understanding The Income Statement
Learn how to use revenue and expenses, among other factors, to break down and analyze a company. 
Personal Finance
The Ten Commandments of Personal Finance
Here are the simple financial Ten Commandments that, when faithfully followed, can lead to a secure economic future. 
Professionals
Project Manager: Career Path & Qualifications
Learn more about what project managers job, the qualifications necessary for the position and the most common careers for these professionals. 
Personal Finance
How Tech Can Help with 3 Behavioral Finance Biases
Even if you’re a finance or statistics expert, you’re not immune to common decisionmaking mistakes that can negatively impact your finances.

What are some of the limitations and drawbacks of using a payback period for analysis?
Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >> 
How do I create grouping schedule codes and subcodes for trial balances?
The payback period is the amount of time it takes for expected cash inflow to cover the initial cash outflow. Calculate the ... Read Full Answer >> 
Is the high cost of installing solar panels justified by the money saved by going ...
In favorable locations and under suitable conditions, homeowners can recuperate the cost of installing solar panels. The ... Read Full Answer >> 
Which is a better measure for capital budgeting, IRR or NPV?
In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >> 
Do you discount working capital in net present value (NPV)?
Net present value (NPV) calculations should include the discounted value of changes in working capital. This treatment of ... Read Full Answer >> 
How is working capital different from fixed capital?
There are several key differences between working capital and fixed capital. Most importantly, these two forms of capital ... Read Full Answer >>