Payback period
Payback period in business and economics refers to the period of time required for the return on an investment to “repay” the sum of the original investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. It intuitively measures how long something takes to “pay for itself”; shorter payback periods are obviously preferable to longer payback periods (all else being equal). Payback period is widely used due to its ease of use despite recognized limitations, described below. The expression is also widely used in other types of investment areas, often with respect to energy efficiency technologies, maintenance, upgrades, or other changes. For example, a compact fluorescent light bulb may be described of having a payback period of a certain number of years or operating hours (assuming certain costs); here, the return to the investment consists of reduced operating costs.
