The Payback Method

You hear people talk about the payback period, as in:

"I live in Nevada, where there are 280 bright and sunny days each year. Yes, I am going solar! My payback period is seven years on a domestic hot water system powered by the sun."

The payback period, typically stated in years, is the time it takes to generate enough cash receipts from an investment to cover the cash outflows from the investment. The method uses a simple sum of future earnings/savings over an arbitrary time period to evaluate capital improvements. It is a quick way to look at an investment and sort potential investments, but the payback method is somewhat lacking in rigor.