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Payback period in capital budgeting refers to the time required to recoup the funds expended in an investment, or to reach the break-even point.
For example, a $1000 investment made at the start of year 1 which returned $500 at the end of year 1 and year 2 respectively would have a two-year payback period. Payback period is usually expressed in years. Starting from investment year by calculating Net Cash Flow for each year:
Net Cash Flow Year 1 = Cash Inflow Year 1 − Cash Outflow Year 1 {\displaystyle {\text{Net Cash Flow Year 1}}={\text{Cash Inflow Year 1}}-{\text{Cash Outflow Year 1}}}
Then:
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