Payback Period

Short definition

Payback is the time until incremental cash recovers the initial outlay. It is a crude liquidity and political-risk screen; it ignores time value and cash after recovery.

Detailed explanation

A fractional year interpolates the remaining gap over that year’s cash. The rule rewards early cash, so it is used as a screen when liquidity is tight or political risk is high.

Cash after the cut-off — salvage, a longer contract, decommissioning — never enters. Without discounting, a lira today equals a lira in year five. Those two gaps are why payback cannot replace NPV.

Why it matters for the CFO

In a high-rate, short-tenor credit market “it comes back in three years” calms a credit committee; undiscounted payback still makes expensive capital look cheap.

How it is calculated

Payback = yatırımın kümülatif artımsal nakitlerle karşılandığı süre

Payback is the date cumulative incremental CF reaches I₀, with linear interpolation if needed. No discounting.

Variables in the formula

• Payback: time until cumulative CF recovers I₀ (with fractional-year interpolation)

How to read it

A short payback is a timing statement, not a profitability statement. The acceptable cut-off depends on sector and project life; there is no universal three-year rule.

Numerical example

I₀ = 12 mn TL, CF 5, 5, 5 mn TL: 10 after two years, 2/5 of year three → 2.4 years. Cash after year three is ignored.

Definitions are educational. They are not investment, credit or tax advice.