What is a Payback Period?
The payback period is how long an investment takes to earn back its initial cost — the simplest project-selection metric there is. Shorter is better; many organizations set a hard ceiling ("nothing over 3 years").
Its two blind spots make it a favorite exam contrast: it ignores the time value of money, and it ignores everything that happens after payback. NPV fixes both — which is why, when metrics disagree, NPV usually wins the exam question.
Formula
Payback period = initial investment ÷ periodic cash inflow
Worked example
A $240K solar installation saves $80K a year in energy: payback = 3 years. Simple and persuasive — but note what it hides: the panels keep saving money for 20 more years after payback, value this metric gives zero credit for. The rival project with a 2.5-year payback and nothing afterward would "win" on payback alone.