The payback period is a financial metric used to determine the time it takes for an investment to generate enough cash flow to recover its initial cost. It is commonly used by businesses to assess the risk and profitability of potential projects. A shorter payback period is generally preferred, as it indicates a quicker return on investment. To calculate the payback period, you divide the initial investment by the annual cash inflows generated by the project. This simple calculation helps investors and managers make informed decisions about where to allocate resources, ensuring that funds are used effectively to maximize returns.