What does the payback period measure?

The payback period is a financial metric used to determine the amount of time it takes for an investment to generate enough cash flow to recover the initial capital outlay. Specifically, it measures the time until the cumulative cash inflows from an investment match the total cash outflows. This means that the correct interpretation of the payback period is the first option: the time until total cash inflow equals total outflow.

The focus of the payback period is on cash flow timing and the timeframe required for investors to regain their investment. It does not directly involve concepts related to Operating Cash Flow (OCF) or depreciation in terms of equating these figures, nor does it concern achieving a positive Net Present Value (NPV) or the specific calculation of investment returns in the broader sense.

The payback period is particularly useful for assessing liquidity and the risk associated with longer-term investments, while also providing a simple means of evaluating different projects based on how quickly the initial cash investment can be recouped.