What is payback period?
The payback period in finance is a measure of how long it will take an organization or individual to recover the initial cost of an investment through cash flows generated by that investment. The calculation of a payback period provides insight into the risks associated with particular investments and helps a company determine which investments they should pursue.
How to calculate payback period?
The payback period is calculated by dividing the initial cost of the investment by the annual cash flow generated by the investment. For example, if an investment has an initial cost of INR 100,000 and it generates INR 20,000 in annual cash flow, the payback period would be 5 years (100,000 / 20,000 = 5).
Payback period formula: Initial investment/Cash flow per year