Payback period

Payback period is the time taken for cumulative cash inflows to recover a project's initial outlay. It is a quick liquidity screen but ignores the time value of money and any post-payback flows.

ByHoang TruongUpdated June 30, 2026

FrameworkInvestment appraisal

See it move

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A project costs €60,000. Year 1 returns €20,000, leaving €40,000 unrecovered; Year 2 returns €25,000, cutting the shortfall to €15,000. Year 3 delivers €30,000, so only €15,000 of it is needed to finish recovery: payback = 2 + 15,000/30,000 = 2.5 years. Anything the project earns after that point never enters the calculation.

Where it fits

TopicCapital Budgeting & Investment AppraisalCoreSubjectCorporate FinanceCore

The formula

LaTeX

\text{Payback} = \frac{C_0}{CF}

Variables

$C_{0}$: Initial investment (€)
$C F$: Equal annual cash inflow (€/year)

Applies only when annual cash flows are equal across all periods.

LaTeX

\text{Payback} = y + \frac{C_0 - \sum_{t=1}^{y} CF_t}{CF_{y+1}}

Variables

$y$: Last full year before payback (years)
$C_{0}$: Initial investment (€)
$C F_{t}$: Cash flow in year t (€)

Used when cash flows are uneven; interpolates within the recovery year.

Check yourself

PracticeCORE

A project requires an initial outlay of €80,000. Annual cash inflows are: Year 1 = €30,000, Year 2 = €35,000, Year 3 = €25,000, Year 4 = €20,000. What is the payback period?

Select an answer to check your understanding.