Payback Period
Whereas PW(i), FW(i), and AE(i) express the cash-flow stream as an equivalent dollar amount and IRR expresses it as an interest rate, payback period expresses it in terms of time. The payback period is simply the time needed to recover the initial investment from the net cash-flow stream. Informally, payback period is just like saying, “This investment will pay for itself in four and a half years.”
Unlike PW(i), FW(i), AE(i), and IRR, which are indicators of profitability, payback period is an indicator of liquidity. Payback period shows the organization's exposure to risk of financial loss. If the proposal is started but gets cancelled before the end of the payback period, the organization will have lost money. A proposal with ...
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