Formula
Payback Period = Initial Investment / Annual Cash Flow
This gives the time needed for incoming cash to offset the initial cost.
Example
Investing 10,000 with annual cash flow of 2,500 gives a payback period of 4 years.
FAQs
What if cash flow varies each year?
Then you add yearly inflows until the cumulative total recovers the upfront cost.
Is payback period the same as ROI?
No. ROI measures return percentage; payback period measures time to recover cost.