The project payout time or payback period, is the amount of time it will take a project to bring cash inflows equal to the cash outflows for the project. This calculation is useful for business managers to determine how long it will take a project to be profitable. In addition, firms can compare two projects by payback period and accept the project with the shorter payback period.
Determine the cost for the project. For example, Firm A wants to buy a $20,000 printing press.
Determine the annual cash inflows. In our example, Firm A's accountants determine if Firm A buys the new printing press, Firm A will increase revenues by $4,000 each year.
Divide the cost by the annual cash flow. In our example, $20,000 divided by $4,000 equals five years. It will take the project five years to become profitable.