Whats a “good”payback period?
This concept actually moves beyond short term investment but also into project decisions so many readers would be familiar with it, but when evaluating businesses and products this requires a different erspective
The payback period in business and finance refers to the length of time required to recover the cost of an investment. In simple terms, it's the time it takes for an investment to generate enough cash flows to recover the initial outlay.
The calculation for the payback period is quite straightforward:
Payback Period = Initial Investment / Annual Cash Inflows
For example, if a company invests $1 million in a project that's expected to generate $200,000 per year, the payback period would be:
$1 million / $200,000 = 5 years
Good? As always in business, it depends
The payback period is dependent on the project or business that you are in, the chart below is a good comparison
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