What does simple payback measure?

Simple payback measures the time it takes for an investment to generate sufficient cash flow to recover the initial investment cost. This metric is critical for investors as it provides a straightforward way to gauge the period required to see a return on their outlay. By focusing solely on the duration until the initial expenses are recouped, simple payback helps in assessing the liquidity and risk associated with an investment, enabling better budgeting and financial planning.

For example, if a company invests $10,000 in energy-efficient lighting and saves $2,000 each year on energy costs, the simple payback period would be five years. This means that the company expects to recover its investment in five years through the savings generated.

Other options relate to different financial aspects: while the total cost of an investment considers the overall expenditure, annual return focuses on profitability and performance metrics, and depreciation involves the allocation of an asset's cost over its useful life. Each of these has its own context and implications, but they do not provide the specific timeframe that the simple payback metric offers.