7.6 : Payback

The payback period is the amount of time taken to recover the initial cost of any investment.

The payback period, expressed in years, is a quick and easy way to assess investment opportunities and risk.

The shorter the payback period, the more attractive the investment would be.

Consider Charlie setting up a lemonade stand with an initial cost of one hundred dollars and earning twenty-five dollars each day from his sales.

To calculate the duration required to recover his startup investment, Charlie divides one hundred dollars by twenty-five dollars,  revealing a payback period of four days.

Similarly, companies often rely on the payback period to guide their investment choices, like buying new equipment or starting a new project, especially when they are looking for a quick recovery of funds.

They want to know how quickly they can get their invested money back.

However, the payback period does not account for the time value of money, potential future profits after the payback period, and the overall profitability of a project.