Calculate investment payback period
Payback Period = Initial Investment ÷ Annual Cash Flow. If you invest ₹5 lakh and earn ₹1 lakh yearly, payback = 5 years. For uneven cash flows, add each year until investment is recovered.
Generally, shorter is better. For equipment: 2-5 years. For technology: 1-3 years. For real estate: 5-10 years. Consider industry norms, asset life, and alternative investment opportunities.
Discounted payback considers time value of money—future cash flows are discounted to present value before calculating. It's longer than simple payback but more accurate for comparing investments.
It measures liquidity risk—how quickly you recover your investment. Shorter payback means less exposure to uncertainty. It's simple to understand and useful for initial screening of projects.
It ignores cash flows after payback, doesn't consider profitability or time value of money (unless discounted), and treats all projects with same payback as equal regardless of size.
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