What is Payback Period?
The payback period is the time it takes for an investment to generate enough cash flow to recover its initial cost. It is a simple measure of investment risk and liquidity recovery.
How It Works
- Estimate annual net cash inflows.
- Divide the initial investment by the annual cash flow (for steady flows).
- For uneven flows, accumulate until the initial cost is recovered.
Saudi Context
Saudi SMEs often use payback as a quick screening tool before applying more rigorous NPV/IRR analysis, especially for equipment financed under SIDF or Kafalah programs.
Example
A SAR 600,000 machine generates SAR 200,000 net cash per year. Payback period is 3 years.