MANUAL OF FINANCIAL CONCEPTS
It is the term which is necessary to recover the initial investment amount, with the cash flows generated by the project.
The investment is recovered in the year in which the accumulated cash flows exceed the initial investment.
It is not considered as an adequate method if it is the only method used. However, it can be used in addition to the NPV.
Example of calculation of Payback:
n: Number of years.
A: Initial investment.
CF: Annual cash flows.
CFac.: Acumulated cash flows.
In this example, the initial investment is recovered in the third year.