Legal Definitions - payback method

The payback method is an accounting technique used to determine the amount of time it takes for a business to recover its initial cash investment. This method is commonly used to evaluate the profitability of a project or investment.

Let's say a company invests $10,000 in a new project. The payback period is calculated by dividing the initial investment by the expected annual cash inflows. If the project is expected to generate $2,000 in cash inflows each year, the payback period would be five years ($10,000 ÷ $2,000 = 5).

Another example could be a small business owner who invests $50,000 in a new product line. The payback period is calculated by dividing the initial investment by the expected annual cash inflows. If the product line is expected to generate $15,000 in cash inflows each year, the payback period would be just over three years ($50,000 ÷ $15,000 = 3.33).

These examples illustrate how the payback method can be used to determine the amount of time it takes for a business to recover its initial investment. By calculating the payback period, businesses can make informed decisions about whether or not to invest in a particular project or investment.