Payback period.

In plain English

The payback period counts how long the cash produced by an investment takes to add up to the amount spent on it. A machine costing $300,000 that produces $100,000 of cash a year pays back in three years. The appeal is simplicity and a focus on how long capital is at risk. The flaw is that it ignores everything after the payback date and ignores the time value of money entirely. A discounted version fixes the second problem by discounting the cash flows first, but it still stops counting once the cost is recovered.

01Why it matters

Time at risk is a real consideration, but a short payback tells you nothing about whether the investment is any good after the money comes back.

02The math, step by step

A $60,000 piece of equipment produces $20,000 of cash a year. $60,000 divided by $20,000 is a three-year payback. A second machine costs the same, pays back in four years, then runs for a decade more. Payback alone would rank the weaker option first.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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