Find out exactly when you'll break even on your investment.
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The Payback Period is a popular capital budgeting metric that calculates the number of years it takes to recover the initial cost of an investment from its generated cash flows. It is simple to calculate and easy to understand.
For even cash flows:
Payback Period = Initial Investment / Annual Cash FlowFor uneven cash flows:
Payback Period = A + (B / C)Where:
A = Last period with a negative cumulative cash flow
B = Absolute value of cumulative cash flow at end of period A
C = Cash flow during the period after A
The Payback Period is the amount of time required for an investment to generate cash flows sufficient to recover its initial cost.
Generally, yes. A shorter payback period means the investment recovers its cost sooner, which reduces risk and improves liquidity.
It ignores the time value of money (unlike NPV) and ignores any cash flows that occur after the payback period is reached.
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