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6 May, 2015 - 17:10

The payback period or cash payback method measures the number of years it will take to recover a capital investment. It is determined by dividing the original investment by annual net cash flows, or, if the cash flows are uneven, by adding up cash flows until the original investment is recovered. Generally, the shorter the payback period the better. A disadvantage of this method is that it does not take into account cash flows beyond the payback period since proposals with longer payback periods may prove to be more profitable in the long-run. The method is used by firms with liquidity problems or high risk.