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The payback method is a simple way to evaluate the number of years or months it takes to return the initial investment. The payback period is usually expressed in years. Start by calculating net cash flow for each year: net cash flow year one = cash inflow year one - cash outflow year one.
The cash payback method fails to include the time value of money. This is a major disadvantage of this method. To illustrate, consider two investments, Project X, and Project Y, which both require an investment of $120,000.