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Capital & valuation
Payback period
How long until a project's cumulative cash inflows equal the initial investment. The simplest capital-budgeting test and the one owners understand first.
Owned by: AnalystTest band: Analyst
The formula
Payback = Initial investment ÷ Annual cash inflow (if even)
In practice
It ignores everything after payback and the time value of money, which is why it should never be the only test. But a 30-month payback on an 18-month runway is its own answer.
The kind of thing the test asks
- A project costs $240k and returns $80k in year 1, $100k in year 2, $120k in year 3. Payback is…