Legal Definitions - payback period

The payback period is the amount of time it takes for a business to recover the initial cash investment made in a project or venture. This calculation does not take into account the time value of money, which means that it does not consider the potential for inflation or the opportunity cost of investing that money elsewhere.

For example, if a company invests $100,000 in a new product line and expects to make $25,000 in profit each year, the payback period would be four years ($100,000 ÷ $25,000 = 4). This means that it would take four years for the company to recover its initial investment.

Another example would be if a company invests $50,000 in a new marketing campaign and expects to make an additional $10,000 in profit each year. The payback period would be five years ($50,000 ÷ $10,000 = 5). This means that it would take five years for the company to recover its initial investment.

The payback period is a useful tool for businesses to determine the feasibility of a project or investment. It helps them understand how long it will take to recover their initial investment and whether the project is worth pursuing.