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
INVESTOPEDIA EXPLAINS '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.
VIDEO

Net Present Value  NPV
The difference between the present value of cash inflows and ... 
Cost Of Capital
The required return necessary to make a capital budgeting project, ... 
Internal Rate Of Return  IRR
The discount rate often used in capital budgeting that makes ... 
Discounted Cash Flow  DCF
A valuation method used to estimate the attractiveness of an ... 
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 ...

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 >> 
What is the difference between calledup share capital and paidup share capital?
The difference between calledup share capital and paidup share capital is investors have already paid in full for paidup ... Read Full Answer >> 
Is there a difference between financial spread betting and arbitrage?
Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>

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. 
Home & Auto
Are Home Inspections Worth It?  Price vs. Value
If you’re wondering whether home inspection is worth the investment, the following information will help you decide. 
Term
How Equity Capital Markets Work
An equity capital market is a market existing between companies and financial institutions that raises money for the companies. 
Budgeting
How to Defray LongTerm Care Expenses
Here's a handful of options on what you can do to defray longterm care expenses. 
Budgeting
The True Cost of Home Caregiving
Caring for eldery family inhome might be unavoidable, but most caregivers don't realize the true cost of doing so. 
Mutual Funds & ETFs
ETF Analysis: Select Sector Financial SPDR
Find out more about the Financial Select Sector SPDR Fund, the characteristics of the exchange traded fund, and the suitability of fund.