The payback period method is best suited for decisions on small, minor projects, whereas the blank NPV method is better suited for large, complex projects.
Simply put, the payback period is calculated by dividing the cost of the investment by the annual cash flow until the cumulative cash flow is positive, at which point the payback year is determined. The payback period is commonly expressed in years. The payback period takes into account the time value of money and is calculated by counting the number of years required to recover the funds invested. The payback period is five years, for example, if it takes five years to recover the cost of an investment.
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