Payback method

The payback method measures the time required to recoup an investment in a capital asset. This technique divides subsequent annual cash flows into the initial investment to determine the payback period. The calculation does not incorporate the time value of money, and so understates the payback period. The main appeal of this method is its extreme simplicity.

As an example of the payback method, an investment of $10,000 that will generate annual cash flows of $2,000 has a payback period of five years.

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Capital Budgeting