Payback period

Payback period in capital budgeting refers to the time required to recoup the funds expended in an investment, or to reach the break-even point.

For example, a $1000 investment made at the start of year 1 which returned $500 at the end of year 1 and year 2 respectively would have a two-year payback period. Payback period is usually expressed in years. Starting from investment year by calculating Net Cash Flow for each year:

${\displaystyle {\text{Net Cash Flow Year 1}}={\text{Cash Inflow Year 1}}-{\text{Cash Outflow Year 1}}}$

Then:

${\displaystyle {\text{Cumulative Cash Flow}}=({\text{Net Cash Flow Year 1}}+{\text{Net Cash Flow Year 2}}+\ldots +{\text{Net Cash Flow Year n}})}$

Accumulate by year until Cumulative Cash Flow is a positive number: that year is the payback year.