Economics Capital Budgeting Questions
The payback period is a financial metric used in capital budgeting to determine the length of time required to recover the initial investment in a project. It represents the time it takes for the cash inflows from the project to equal the initial cash outflow.
To calculate the payback period, you need to follow these steps:
1. Determine the initial investment or cash outflow for the project.
2. Calculate the cash inflows generated by the project for each period.
3. Subtract the cash inflows from the initial investment until the cumulative cash inflows equal or exceed the initial investment.
4. The payback period is the time it took to reach this point, usually expressed in years or months.