What does the payback period measure?

• A. Net present value
• B. Time required to recover the initial investment from cash inflows
• C. Rate of return on investment
• D. Future value of cash inflows

Answer: (B)

Payback period measures how long it takes for an investment to be repaid from its cash inflows. You track the expected cash inflows year by year and see when they equal the initial outlay; if needed, you can interpolate within a year to get a more precise recovery time. This metric focuses on liquidity and how quickly the invested money is returned, not on overall profitability.

It ignores the time value of money, so early and later cash flows aren’t weighted differently, and it doesn’t consider cash flows that occur after the investment is paid back. The other concepts involve discounting cash flows to account for time value, assessing overall return rate, or projecting future value, which are about value and profitability rather than speed of recovery.