pay-back period
pay-back periodThe period during which a firm requires that it get back the cost of new equipment in profits, if it is to invest. Pay-back period is not an economically rational investment criterion: it passes a project which brings in 101 per cent of its cost in the first N years and nothing thereafter, even though the present discounted value of the expected profits is well below 100 per cent, and fails a project which brings in only 99 per cent of its cost in the first N years, but is expected to do so well later that its present discounted value is 200 per cent of costs. It is, however, used as a rough and ready first step in sorting out projects worthy of closer study.
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