The Payback Method

The payback method is a method of evaluating a project by measuring the time it will take to recover the initial investment.

To calculate a more exact payback period: Payback Period = Amount to be initially invested / Estimated Annual Net Cash Inflow.

The payback method is more effective at accurately projecting payback periods when it is discounted to incorporate the time value of money.

Payback period as a tool of analysis is easy to apply and easy to understand, yet effective in measuring investment risk.

Payback period analysis ignores the time value of money and the value of cash flows in future periods.