Final answer:
The payback period is the time it takes for a firm to recover the money invested in a project, typically considered through the lens of net cash inflows. Businesses use this period to evaluate the attractiveness of an investment, with shorter periods being preferred.
Step-by-step explanation:
The length of time a firm must wait to recoup the money it has invested in a project is called the payback period. This is the period during which the initial investment is expected to be recovered from the net cash inflows generated by the investment. The simple payback time can be calculated by dividing the cost of the investment by the annual savings. In practice, many decisions in business, especially those related to capital investments, depend on the assessment of the payback period. Shorter payback periods are often more attractive as they imply quicker recovery of investment costs.
For instance, if you are considering installing extra insulation that costs $4.00 per square meter and you expect to save $1.00 per million joules on energy costs over a 120-day heating season with an average temperature difference of 15.0°C, you would calculate the payback time based on the total energy savings realized due to the insulation.