The payback periodmeasures how long a project or investment takes to repay any initial outlay. For example, if you spend £1,000 on shares, then receive a dividend of £200 at the end of every year, the payback period is five years.
Payback is useful because it focuses on cash flows a vital consideration in any investing decision. But it's also flawed. It ignores that £200 received in one year is worth more than £200 received after three years.
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