The payback period calculation answers the question: how soon do I recover my cash investment?

It is calculated as:

Stream of cash inflows divided by the original cash investment

So, if an investment produces a $100 a year for five years and the original investment is $300, then, the payback period is three years.

It's a useful rough risk guide -- the longer the payback period the greater the risk-- but has limitations:

• Says nothing about the timing of cash flows (no discounting)
• Ignores cash flows after the payback period
• Tells you when your investment principal is paid back, but is silent on any return on your capital.