The formula for calculating the payback period is Payback Period Initial Investment Annual Cash Flow Where Initial Investment is the total cost of the investment. Annual Cash Flow is the net cash inflow generated by the investment each year. The payback period is expressed in years. It represents the time taken for the investment to generate enough cash flow to recover the initial investment. A shorter payback period is generally considered more favorable, as it indicates a quicker return on investment. For example, if the initial investment is 10,000 and the annual cash flow is 2,000, the payback period would be Payback Period 10,000 2,000 5 years So, it would take 5 years to recoup the initial investment based on the given annual cash flow.