What is the Payback Period

The payback period is the length of time required to recover the COST of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions. The payback period ignores the time value of money (TVM), UNLIKE other methods of capital budgeting such as net present value (NPV), internal rate of return (IRR), and discounted cash flow.

Payback Period

BREAKING DOWN Payback Period

Much of corporate finance is about capital budgeting. One of the most important concepts that every corporate financial analyst MUST learn is how to value different investments or operational projects. The analyst must find a reliable way to determine the most profitable project or investment to undertake. One way corporate financial analysts do this is with the payback period.

Capital Budgeting and the Payback Period

Most capital budgeting formulas take the time value of money into consideration. The time value of money (TVM) is the idea that money today is worth more than the same amount in the future due to present money's earnings potential. Therefore, if you PAY an investor tomorrow, it must include an opportunity cost. The time value of money is a CONCEPT that assigns a value to this opportunity cost.

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