What is the formula for the payback period?

The payback period is a capital budgeting technique used to determine the length of time required to recover the initial investment in a project. It is a simple and widely used method, particularly for preliminary screening of projects. The formula for calculating the payback period is straightforward: Initial investment / Annual cash inflow. This calculation directly measures how many years (or periods) it will take for the cumulative annual cash inflows generated by a project to equal the original cost of the investment.

• Net income / Investment is a profitability ratio, not the payback period.
• Cash inflow / Debt relates to debt coverage, not investment recovery time.
• Investment / Net profit is also a profitability measure, often related to return on investment, but not the payback period.

The payback period focuses solely on the speed of capital recovery, making it a useful metric for liquidity assessment.