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Project management I: The business case

7.2 Payback period

The payback period is the time a project will take to pay back the
money spent on it; the time which elapses until the invested capital is
recovered.

Initial investment

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Payback period =
Annual cash inflow

Compare the payback period to the company’s maximum return time
allowed and if the payback is quicker the project should be accepted.

Faced with a choice between mutually exclusive projects, chose the
project with the quickest payback, provided it meets the company’s
target payback period.

Suitability This is best for short projects where there is a shortage of cash for
investment.

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