In short
The payback period is the time it takes for a project's cash inflows to recover the initial investment. Shorter payback means less exposure to risk and faster return of cash.
Key takeaways
- It ignores the time value of money and cash flows after the payback point.
- The discounted payback period uses discounted cash flows to address the first weakness.
- It is a measure of liquidity and risk, not of profitability.
Example
An investment of $100,000 returning $25,000 a year pays back in 4 years.
Where it's tested
BAR: Financial Forecasting, Budgeting & Valuation — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A product sells for $80 with variable costs of $50 per unit. Fixed costs are $360,000. How many units must be sold to earn a target operating profit of $90,000?