The payback rule is a simple investment rule. First we find the payback period, which is the amount of time it takes to recover or pay back the initial investment. The payback rule is simply: if payback period is less than a pre-specified length of time, accept the project.
The payback rule is used by many companies because of its simplicity. However, the payback rule does not always give a reliable decision since it ignores the time value of money, and it requires us to use an arbitrary cutoff period in summing the cash flows.