Payback Period
Also called: payback
What is Payback Period?
The payback period is the time an investment takes to generate enough cash to recover its initial cost. It is the simplest investment test and the one small businesses use most.
Why Payback Period matters
Payback speaks the language of survival rather than of theory. For a business with limited cash, how fast money comes back often matters more than how much comes back eventually.
Payback Period formula
Payback period = Initial investment ÷ Net cash inflow per period
Ignores everything that happens after payback, so pair it with ROI.
How Payback Period works in practice
Use monthly cash generated, not accounting profit, and compare payback against the asset's useful life. Anything that pays back close to the end of its life is a poor use of capital.
Worked example
A ₹3,00,000 machine generating ₹40,000 a month of extra cash pays back in about 7.5 months.
Frequently asked questions
Depends on the asset and your cash position — equipment paying back within a year is generally comfortable.