Payback Period
Time required to recover initial investment from cash flows.
Formula
Payback Period = Initial Investment ÷ Annual Net Cash Flow
Real World
A small bakery investing £40,000 in a new oven that generates £10,000 extra profit per year would have a payback period of 4 years — a key figure when the owner is deciding whether the bank loan is manageable.
Exam Focus
Show your working clearly; if cash flows vary annually, cumulate them year by year and state the exact month payback occurs.
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