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Defining the payback period for nonconventional cash flows: an axiomatic approach

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  • Mikhail V. Sokolov

Abstract

The payback period is unambiguously defined for conventional investment projects, projects in which a series of cash outflows is followed by a series of cash inflows. Its definition for nonconventional projects is more challenging, since their balances (cumulative cash flow streams) may have multiple break-even points. Academics and practitioners offer a few contradictory recipes to manage this issue, suggesting to use the first break-even point of the balance, the last break-even point of the balance, or the moment in time at which the cumulative sum of net cash inflows first exceeds the total sum of net cash outflows. In this paper, we show that the last break-even point of the project balance is the only definition of the payback period consistent with a set of economically meaningful axioms. An analogous result is established for the discounted payback period.

Suggested Citation

  • Mikhail V. Sokolov, 2025. "Defining the payback period for nonconventional cash flows: an axiomatic approach," Papers 2511.03568, arXiv.org, revised Mar 2026.
    • Handle: RePEc:arx:papers:2511.03568
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    References listed on IDEAS

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    1. Yard, Stefan, 2000. "Developments of the payback method," International Journal of Production Economics, Elsevier, vol. 67(2), pages 155-167, September.
    2. John Graham, 2022. "Presidential Address: Corporate Finance and Reality," NBER Working Papers 29841, National Bureau of Economic Research, Inc.
    3. John R. Graham, 2022. "Presidential Address: Corporate Finance and Reality," Journal of Finance, American Finance Association, vol. 77(4), pages 1975-2049, August.
    4. Sokolov, Mikhail V., 2024. "NPV, IRR, PI, PP, and DPP: A unified view," Journal of Mathematical Economics, Elsevier, vol. 114(C).
    5. Siziba, Simiso & Hall, John Henry, 2021. "The evolution of the application of capital budgeting techniques in enterprises," Global Finance Journal, Elsevier, vol. 47(C).
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