What is the main limitation of the payback period?

It ignores cash flows after the payback date and the time value of money. A project with large cash flows after year 5 would look worse than one with modest early cash flows, even if the first is more valuable.

What payback period is acceptable?

Varies by industry. Consumer electronics: 1-2 years. Manufacturing equipment: 3-5 years. Infrastructure: 7-15 years. Short payback thresholds reflect risk aversion.

How is fractional year payback calculated?

When cumulative cash flows cross zero between two periods, interpolate: Payback = years before final period + (remaining cost / cash flow in final period). For $100K investment: if year 3 cumulative = -$20K and year 4 CF = $40K, payback = 3.5 years.

Payback Period Calculator

Calculate the time required to recover the initial investment from cumulative cash flows. Simple undiscounted payback period is widely used as a quick project screening tool.

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Frequently Asked Questions

What is the main limitation of the payback period?

What payback period is acceptable?

How is fractional year payback calculated?