What does a longer payback period typically indicate about a project’s risk?

A longer payback period typically indicates higher risk due to uncertain returns because it suggests that the time taken to recoup the initial investment is extended. When a project has a longer payback period, it implies that the cash inflows generated by the project will take more time to accumulate, leading to increased uncertainty regarding whether the project will be able to generate the expected cash flows.

Investors may view longer payback periods as risky because they are exposed to various external factors and changes in market conditions that could potentially affect the project's performance over time. These factors can include economic downturns, changes in consumer preferences, regulatory shifts, or unforeseen operational challenges. A longer duration before recovering investment creates a larger window of uncertainty, meaning that the project's ability to deliver returns becomes less predictable.

Conversely, shorter payback periods are often perceived as less risky because they enable quicker recoupment of investments, thereby reducing exposure to uncertainties in future cash flow projections. This is why a longer payback period is frequently associated with higher risk in project evaluations.