How it works
Simple payback counts the years until the cumulative net cash flow equals the investment. With a constant annual cash flow C and an investment I, payback = I / C. With uneven cash flows, add them year by year until the running total passes the investment. Then payback = Y + (I − S_Y) / CF_(Y+1), where Y is the last full year before recovery, S_Y is the cumulative cash flow at the end of year Y, and CF_(Y+1) is the cash flow in the year after.
Discounted payback repeats the count with each cash flow discounted at the cost of capital. It is always longer than simple payback. Both ignore everything after the payback date. A project that pays back in six years and then earns nothing scores better than one that pays back in seven and earns for twenty more. For that reason payback is read beside NPV and IRR. It works as a rough measure of exposure. The sooner the money is back, the less a change in policy, prices or technology can hurt.
Why it matters
Industrial buyers often approve on-site solar, storage or an efficiency upgrade against a payback rule, such as three to five years. It suits budgeting, where capital competes with other uses inside the company. Developers and lenders rely on it less, but it is a quick test of how long money is at risk. For a battery whose revenue depends on price spreads that may narrow, a short payback limits the cost of being wrong about later years.
A worked example
A factory installs 2 MW of rooftop solar for $1.6 million. It saves $350,000 a year in each of the first three years, then $400,000 a year after a tariff rise. After three years the total is 3 × 350,000 = $1,050,000. After four it is 1,050,000 + 400,000 = $1,450,000, still 1,600,000 − 1,450,000 = $150,000 short. Payback = 4 + 150,000 ÷ 400,000 = 4 + 0.375 = 4.4 years.
Illustrative figures.