What does the Payback Period measure?

The Payback Period specifically measures the time it takes for an investment to generate enough cash flows to recover the initial investment cost. It is a straightforward metric that helps investors and managers understand how quickly they can expect to see a return on their investment. This period is calculated by summing the cash inflows until they equal the initial investment.

While it is primarily focused on the liquidity aspect of an investment, it does not take into account the overall profitability of a project or the time value of money. Therefore, it is a simple and useful measure for assessing risk, as a shorter payback period generally indicates lower risk.