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. ^[1]

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:

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

Then:

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

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

^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN 0-13-705829-2. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language: Marketing Activities and Metrics Project.

[Marketing_Metrics-1] Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN 0-13-705829-2. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language: Marketing Activities and Metrics Project.

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