What is payback period?

What is payback period?

What is Payback Period?

• The amount of time required for an investment to generate cash flows to recover its initial cost.
• An investment is acceptable if its calculated payback is less than some prescribed number of years.

Example:
Year                Cashflow
0                      -$1000
1                       $600
2                       $300
3                       $500

The pay back period (where you get back your initial investment of $1000) will be in between year 2 and year 3. The exact answer is 2.2 years. Not sure how to get the answer?