Payback Period
The payback period is the time it takes for an investment to generate cash flows sufficient to cover its initial cost. It is a commonly used metric in capital budgeting to assess the risk and viability of an investment. Shorter payback periods are typically preferred, as they indicate quicker recovery of the investment. However, the payback period does not account for the time value of money or cash flows beyond the recovery period.
Key Takeaways
- Measures the time needed to recoup an investment.
- Indicates investment risk and viability.
- Common in capital budgeting.
- Helps in quick decision-making.
