Payback Period Calculator
This payback period calculator finds how long an investment takes to earn back its cost from up to five years of cash flows. Enter the initial investment, the yearly cash flows, and an optional discount rate, and the payback period calculator returns the simple payback period and the discounted payback period in years.
Results
The Payback Period Calculator is part of our Investment collection. Browse more investment to size, convert, and check your work alongside this tool.
What the payback period calculator shows
The payback period is the time it takes for an investment's cash inflows to repay its cost. The payback period calculator adds the yearly cash flows until the running total turns positive and works out the fraction of the final year. With a discount rate it also gives the discounted payback period, which counts money in today's value.
Payback period formula for uneven cash flows
With equal yearly cash flows, payback is simply the investment divided by the annual cash flow. The discounted payback period repeats the method with discounted cash flows, so it is always longer than the simple payback.
Payback period calculator example
An investment of $50,000 with cash flows of $12,000, $15,000, $18,000, $20,000, and $22,000:
Total cash inflow over the five years is $87,000.
How to use the payback period calculator
Enter the initial investment, the cash flow expected in each of the next five years, and a discount rate if you want the discounted figure. The payback period calculator handles even and uneven cash flows. If the project has not paid back within five years, it says so instead of guessing.
Reading the simple payback period
A shorter payback means less risk, because the money comes back before forecasts become uncertain. Many firms set a target, such as three or four years. Payback ignores cash after recovery, so a project with a slightly longer payback can still be far more profitable overall; use NPV or ROI alongside it.
When to calculate the project payback period
- Screening projects by project payback period
- Checking equipment or solar investments
- Comparing payback with and without discounting
- Working through payback period problems with uneven cash flows
Common payback period calculator mistakes
- Stopping at whole years. Include the fraction of the recovery year.
- Counting the investment year as a return year.
- Judging by payback alone. Check NPV or ROI too.
Tips for accurate results
- Use realistic, not hopeful, cash flows.
- Use your cost of capital as the discount rate.
- Compare projects on the same basis.
Calculate discounted payback period
To calculate discounted payback period, divide each year's cash flow by (1 + r) raised to the year number, then track the running total as before. At 10 percent, the example cash flows become $10,909, $12,397, $13,524, and $13,660, and recovery happens near the end of year four instead of a quarter of the way through it. Discounting makes the measure fairer to money received sooner. For a single break-even point in units rather than time, the break-even calculator uses fixed and variable costs.
Payback period with uneven cash flows
Uneven cash flows are the normal case. Keep a running total year by year, find the last year it is negative, and divide the remaining shortfall by the next year's inflow.
Payback period reference (even cash flows)
| Investment | Annual cash flow | Payback |
|---|---|---|
| $10,000 | $2,500 | 4.0 years |
| $50,000 | $12,500 | 4.0 years |
| $30,000 | $10,000 | 3.0 years |
| $80,000 | $32,000 | 2.5 years |
Payback Period Calculator FAQ
What is the payback period formula?
With equal cash flows, investment ÷ annual cash flow. With uneven cash flows, years before recovery plus the unrecovered amount divided by the next year's cash flow.
What is the discounted payback period?
The payback period using cash flows discounted to today's value, which makes it longer than the simple payback.
What is a good payback period?
It depends on the industry, but many businesses aim for three to five years.
What does payback period ignore?
Cash flows after recovery and, in the simple version, the time value of money.