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Payback period

Simple payback period is how long it takes before the annual savings or income has covered the investment, without discounting. It is easy to calculate, but ignores the time value of money and everything that happens after the investment is paid back.

T=I0CT = \frac{I_0}{C}simple payback period with equal annual cash flows CC

Symbols

I0I_0investmentkr
CCannual savings/incomekr
TTpayback periodyears

Example

Machine costing 100,000 kr saves 40,000 kr/year:

T=100000/40000=2.5T = 100000/40000 = 2.5 years.

A short payback period does not necessarily mean high profitability — the method ignores cash flows afterwards.
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Part of Engineering Economics: Investment analysis.