Payback Period, usually the abbreviation PP is used. It is the number of years that are needed to make the cumulative cash flows from the year 1 offset the investment, thus it is the number of years, after which the investment will return.
If the resulting value is lower than the lifetime of the project, the expenses incurred on it will return during its operation.
Payback period can be used as:
Static method that ignores the time factor Dynamic method that takes into account the time factor by discounting the cash flows and adding them to the payback period.
The method is used more as a complementary, its disadvantage is that it ignores the financial flows of the investment, which follow after the payback period.
Use of the Payback Period in practice: In the business it is used by CFO (Chief Financial Officer) while evaluating the effectiveness of the investment. The criterion should be used only as complementary.