Payback period is important when time and cash flow are an issue. Simple payback period shows how long it will take for an investment to show a profit. It is the time it takes for your project to recoup the funds expended and normally is expressed in years or months.  The biggest plus of payback period is that it is simple to calculate. The equation for a simple payback period is
initial cost / annual net benefit


Payback period does have a few drawbacks:

  • It does not tell you anything about the performance of your investment after the payback period
  • It does not tell you anything about the magnitude of your project
  • It does not take into account the time value of money