Valuation and investment
Payback period
How long until an investment earns back its cost.
Last reviewedWhat does Payback period mean?
The payback period is the time it takes for the cash an investment brings in to add up to what you spent on it. Spend 1,000 on a machine that saves 250 a year, and the payback is four years. It is simple and fast, but it ignores the time value of money and any cash after the payback date, so two projects with the same payback can be worth very different amounts.
Where does it come up in case interview prep?
- Unit economics in any businessLesson in How industries work: the toolkit
- Judging an investment: payback, ROI, and present valueLesson in Case math and quantitative reasoning
- Main players, trends 2024 to 2026, regulation and casesLesson in Healthcare providers and payers
- Service delivery, KPIs and public-private partnershipsLesson in Government, public sector and non-profits
- Market expansionLesson
- Market entryLesson
- Written, presentation and group cases: formats and techniqueLesson in Written, presentation and group cases
- Mergers, acquisitions, and due diligenceLesson
Related terms
- Return on investment (ROI)The gain from an investment relative to its cost.
- Net present value (NPV)Today's value of all future cash flows, minus the upfront investment.
- Time value of moneyMoney today is worth more than the same money later.
- Discount rate and hurdle rateThe rate used to turn future cash into today's value.
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- DCF (discounted cash flow)Valuing a business from the future cash it will generate.
- Enterprise value (EV) and EV/EBITDAThe value of the whole business, to lenders and owners together.