Simple but ineffective by itself, the payback period (PP) method calculates the time necessary to pay back the initial cost (i.e., a breakeven analysis). It does not take into account time valuation of money, and it does not consider different life spans after the initial payback breakpoint and ignores the cost of capital. The payback period approach helps identify the project’s liquidity in determining how long funds will be tied up in the project.
Payback = Year before full recovery + [unrecovered cost ÷ Cash Flow at time t]
