The payback period is the amount of time (usually measured in years) it takes to recover an initial investment outlay, as measured in after-tax cash flows. ... For example, if a payback period is stated as 2.5 years, it means it will take 2½ years to receive your entire initial investment back.

How do you calculate payback period?

To calculate the payback period you can use the mathematical formula: Payback Period = Initial investment / Cash flow per year For example, you have invested Rs 1,00,000 with an annual payback of Rs 20,000. Payback Period = 1,00,000/20,000 = 5 years.

Does payback period include depreciation?

Example: A project costs $2Mn and yields a profit of $30,000 after depreciation of 10% (straight line) but before tax of 30%. Lets us calculate the payback period of the project. While calculating cash inflow, generally, depreciation is added back as it does not result in cash out flow.