Payback period
The time required for an investment to generate enough net cash flows to recover the initial outlay. A simple and intuitive decision criterion, though imperfect as it ignores cash flows beyond the recovery point.
In practice
The payback period is the preferred investment criterion for companies with constrained cash positions: it minimises liquidity risk. A 100,000 euro investment generating 25,000 euros of annual net return has a four-year payback. Its limitation: two projects with identical four-year paybacks may have very different total returns if one generates significant flows in years 5 to 10 and the other does not. Combining payback with net present value (NPV) provides a more complete picture.