Paybackperioden

Paybackperioden, or payback period, is the time required for an investment to recoup its initial cost from the cash inflows it generates. It is a simple liquidity metric used in capital budgeting to assess how quickly the invested capital can be recovered. There are two common variants: the simple (undiscounted) payback period and the discounted payback period, which accounts for the time value of money.

For a project with equal annual cash inflows, the simple payback period equals the initial investment divided by the annual cash inflow. For irregular cash flows, the payback period is found by adding cash inflows year by year until the cumulative cash flow equals or exceeds the initial investment. If recovery occurs partway through a year, linear interpolation can estimate the fractional year needed.

Discounted payback period uses discounted cash flows, typically discounting each cash inflow at the project’s cost of capital. The payback occurs when the sum of the discounted inflows equals the initial investment. This version reflects the time value of money and generally yields a longer payback than the simple method.

Limitations: the payback period ignores cash flows that occur after the initial recovery, and it does not measure overall profitability or value creation. It depends on the chosen horizon and can bias decisions toward liquidity over profitability. The discounted variant partly mitigates time value concerns but still omits information about total net present value or internal rate of return, so it should not be used in isolation.

Use in practice: payback can be useful as a quick screening tool, especially for liquidity risk assessment or when rapid reimbursement is critical. It is typically used alongside other capital budgeting metrics such as net present value (NPV) and internal rate of return (IRR) to evaluate a project.