Final answer:
Cost recovery, or payback time, is the time taken to recover the initial investment through revenues or cost savings. For instance, an investment of $1,000 with an annual return of $100 has a payback time of 10 years. In business, accounting profit is calculated by deducting explicit costs from revenues.
Step-by-step explanation:
Cost recovery, also known as payback time, is a crucial concept in the field of business and finance. It refers to the period of time it takes for an investment to generate enough revenues or savings to cover the initial cost outlay. To illustrate, if a business makes a $1,000 investment to eliminate a recurring annual cost of $100, the payback time for this investment would be 10 years, since it would take that long for the savings to equal the initial expenditure.
To further clarify this concept, consider an example of calculating accounting profit. Initially, one would add up all explicit costs, such as the sum of office rental fees and a law clerk's salary which total to $85,000. Then, we deduct these explicit costs from the revenues earned ($200,000) to arrive at the accounting profit, which, in this case, is $115,000.