Definition

Payback period is the time required for a company to recover the cost invested in a project. The The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions.

The Payback Period helps to determine the length of time required to recover the initial cash outlay in the project. Simply, it is the method used to calculate the time required to earn back the cost incurred in the investments through the successive cash inflows.It is very simple to calculate and easy to understand. This method is helpful to analyze risk, i.e. to determine how long the investments will be at risk. It is beneficial for the industries where the investments become obsolete very quickly. It measures the liquidity of the projects. The major drawback of this method is that it ignores the Time Value of Money. It does not take into consideration the cash flows that occur after the payback period.

Further Reading:

Book: Disciplined Agile Delivery by Scott W. Ambler and Mark Lines