Payback Period is defined as:
AThe time required to recover the initial investment from cash inflows
BThe depreciation period of the asset
CThe IRR of the project
DThe discount rate at which NPV = 0
Answer & Solution
Correct answer: A. The time required to recover the initial investment from cash inflows
1. Payback Period = time taken for cumulative cash inflows to equal initial investment.
2. For uniform cash flows: Payback = Initial Investment / Annual Cash Flow.
3. Does not consider time value of money in its simple form.
_Source: ICAI BoS CA Inter Paper 6A, Ch 7 "Investment Decisions", §6 — Payback_