Payback period is a financial metric that refers to the period of time required for the return on an investment to repay the sum of the original investment. It corresponds to the length of time required for cumulative incoming returns to equal the cumulative costs of an investment, usually measured in years.

If there are projected benefits at the start of the project which exceed costs, then payback period is zero, corresponding to the first time period. If costs reduce over time and benefits continue to accrue, the payback period is the period at which the accrued benefits equals or exceeds the accrued costs. If the accrued benefits never equal or exceed the accrued costs, then the payback period is -1, indicating that a payback condition is never met.

For example, a USD1000 investment with USD500 returns every year would have a two-year payback period. The investment with the shorter payback period is considered the better investment because the investment costs are recovered sooner and are available again for further use.

The payback period is the first period in which the benefits exceed the costs for the project. For example, if j time periods elapse before the sum of benefits exceed the sum of costs, the payback period is j. To compute the payback period, a discounting factor is also included in the calculation. The formula is used for a standard investment analysis model, which has a value stream, Revenue (R), and two cost streams, Development Cost (D) and Maintenance Cost (M).