The payback period (PBP) is the time it takes to recover the initial investment.
For example, we have a dairy company, and we purchased a cheese processing machine for eight years at $20,000. The payback period helps to calculate how long it will take to recover this investment.
It is calculated as;
PBP= (Initial Investment/ Annual Cash Flow)
Let’s assume that our machine generates an equal annual cash flow of $2,000 for eight years.
Here, the payback period for our machine is 10 years.
