What is Payback Period?
The payback period is a financial metric used to evaluate the time it takes for an investment to recoup its initial cost through the cash flows it generates. It measures the length of time required for an investment to repay its initial outlay, making it a straightforward measure of investment risk and liquidity. The calculation involves dividing the initial investment cost by the annual cash flows generated by the investment. The payback period is expressed in years or months, depending on the duration of the investment and the frequency of cash flows.
Investors typically use the payback period to assess the risk associated with an investment by comparing it to other investment opportunities. A shorter payback period is generally preferred as it indicates a quicker return of the initial investment. However, the payback period does not consider the time value of money, inflation, or cash flows beyond the payback period, which limits its effectiveness as a comprehensive investment evaluation tool.
How to Calculate Payback Period?
Payback Period calculator uses Payback Period = Initial Investment/Cashflow per Period to calculate the Payback Period, The Payback Period formula is defined as a financial metric used to assess the time it takes for an investment to generate cash flows sufficient to cover its initial cost. Payback Period is denoted by PBP symbol.
How to calculate Payback Period using this online calculator? To use this online calculator for Payback Period, enter Initial Investment (Initial Invt) & Cashflow per Period (C_{f}) and hit the calculate button. Here is how the Payback Period calculation can be explained with given input values -> 1.333333 = 2000/1500.