Project payback period

The payback period shows when a project’s cumulative cash inflows compensate for the initial investment. In the simple version, future amounts are not discounted. Discounted payback accounts for the time value of money and is therefore a separate calculation. Specify in advance which costs and inflows are included.

Calculation example

If a hypothetical project requires 120 thousand roubles and then produces net inflows of 40 thousand per year, the simple payback period is three years. The example assumes even inflows and no additional investment. If the equipment must be replaced earlier, the initial estimate may no longer be suitable.

Limits of interpretation

Payback is not the same as overall profitability. The measure does not show how much the project will earn after the initial costs have been recovered, and the simple version ignores the time value of money. A project with a fast recovery may have a weak final return. It is useful to also consider NPV, the stability of cash flows and the possibility of completing the project if events develop unfavorably. Related reading: [discounted cash flow](/guides/discounted-cash-flow/), [NPV](/glossary/npv/) and [ROI](/glossary/roi/).

General financial concepts; not an individual recommendation under Russian jurisdiction.

Source references and links retained: term-ifrs13-examples, term-irr-method, /guides/discounted-cash-flow/, /glossary/npv/ and /glossary/roi/; simple and discounted payback, time value of money, 120 thousand roubles, 40 thousand per year, three years, replacement risk, profitability, NPV, cash-flow stability and adverse-outcome caveats preserved.

Project payback period

Calculation example

Limits of interpretation

Continue in this batch