Payback period (PP) is the number of years a company takes to recover its original investment in a project, when the net cash flow equals zero. When choosing among mutually exclusive projects, the project with the quickest payback is preferred. The Net Cash Flow (NCF) for the project in each year is used to calculate the payback period. Capital Budget Payback Period Formula is given to calculate the payback period by dividing the total investment cost by the annual net cash flow.
When two projects are compared, the one that has the maximum payback period and the minimum payback period will be the project that is accepted.