Which measure shows how many years it takes for the cash flows to repay the original investment?

• A. A measure of how many years it takes for the cash flows affected by the decision to invest to repay the cost of the original investment.
• B. A method of discounting cash flows to determine net present value.
• C. The annual percentage return of a project.
• D. The cost of capital.

Answer: (A)

The measure described is the payback period. It tells you how many years it takes for the cash inflows from a project to repay the initial investment. It’s a simple liquidity check that emphasizes how quickly the investment is risked back to you. A key caveat is that it normally ignores the time value of money (unless you’re using a discounted payback variant) and also ignores any cash flows received after the payback point. That’s why it’s distinct from net present value, which discounts all cash flows to their present value to assess overall profitability; it’s also different from a straightforward return rate, which focuses on profitability as a percentage rather than the timing of recovering the outlay; and from the cost of capital, which is the hurdle rate or minimum required return, not a measure of how long recovery takes.