The payback period is the time needed to recover the total cash invested. Payback period is an important factor for taking up any investment or project or not. Projects with shorter time payback period are most preferable than ones with longer payback period.
How to calculate payback period?
Payback can be calculated in two methods i.e. with even cash flow and with uneven cash flow.
1- With even cash flow
Payback Period = Cost of project/investment / Net annual cash inflow
2- With uneven cash flow
Payback Period = No. of years before full recovery + Unrecovered cash at the start of the year / cash flow during the year