What is payback period?
It's the length of time it'll take for an investment to recover its initial outlay.
Where have you heard about payback period?
It's often in the news when analysts are discussing the strengths and weaknesses of investment in certain industries. For example, solar energy often comes with long payback periods, so if they shorten, investors sit up and take notice.
What you need to know about payback period.
It's probably the simplest method of investment appraisal used by investors[link.]. Let's say an investor is thinking about investing £1,000 in a company. If the investment makes £500 a year, the payback period is two years. Before committing, the investor knows that it won't be long before the initial outlay is wiped out, and anything on top of that is profit. But no matter how short a payback period is, investors should realise that a company can fail and investors lose their money even if the company appears strong.