Payback Period Calculator
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The payback period is how long an investment takes to earn back what it cost. A $50,000 machine that brings in $12,000, $15,000, $18,000 and then $20,000 a year pays for itself in 3.25 years. At an 8% discount rate, the discounted payback is about 3.8 years.
Year 1 first. Use a minus sign for a year with a net outflow.
| Payback | |
| Simple payback period | 3.25 years |
| Discounted payback (8%) | 3.8 years |
| Year by year | |
| Year 1: cumulative (discounted) | -$38,000 (-$38,889) |
| Year 2: cumulative (discounted) | -$23,000 (-$26,029) |
| Year 3: cumulative (discounted) | -$5,000 (-$11,740) |
| Year 4: cumulative (discounted) | $15,000 ($2,961) |
| Year 5: cumulative (discounted) | $35,000 ($16,572) |
Show steps
- After 3 full year(s) you have recovered $45,000 of $50,000.
- The remaining $5,000 comes in year 4: $5,000 / $20,000 = 0.25 of a year, so payback = 3.25 years.
- Discounted payback repeats this with each cash flow divided by (1 + 8%) to the power of its year.
How to use the payback period calculator
- Enter the initial investment.
- Choose whether the yearly cash flows are the same each year or different, and enter them. Year 1 comes first.
- Enter a discount rate, such as your cost of capital, for the discounted payback period.
- Press Calculate to see both payback periods and the year-by-year running total.
Payback period formula
Even cash flows: payback period = initial investment ÷ yearly cash flow. A $50,000 project that brings $14,000 a year pays back in 50,000 ÷ 14,000 ≈ 3.57 years.
Uneven cash flows: add the cash flows year by year until the total reaches the investment. Then payback = years before full recovery + (amount still needed ÷ cash flow in the recovery year).
Discounted payback: first divide each cash flow by (1 + r)t, where r is the discount rate and t the year, then find the payback the same way.
Worked example: uneven cash flows
| Year | Cash flow | Cumulative | Discounted at 8% | Cumulative discounted |
|---|---|---|---|---|
| 0 | −$50,000 | −$50,000 | −$50,000 | −$50,000 |
| 1 | $12,000 | −$38,000 | $11,111 | −$38,889 |
| 2 | $15,000 | −$23,000 | $12,860 | −$26,029 |
| 3 | $18,000 | −$5,000 | $14,289 | −$11,740 |
| 4 | $20,000 | $15,000 | $14,701 | $2,961 |
Simple payback: 3 years + 5,000 ÷ 20,000 = 3.25 years. Discounted payback: 3 years + 11,740 ÷ 14,701 ≈ 3.80 years.
Simple vs discounted payback
Simple payback treats $1 received in year 4 the same as $1 today. Discounted payback reduces later cash flows to today’s value, so it is always the same or longer. If the discounted cash flows never reach the investment, the project does not earn your required return.
Limits of the payback period
- It ignores everything after the payback year, so a project with large later returns can look worse than it is.
- Simple payback ignores the time value of money.
- It measures speed, not profit. Use it alongside net present value (NPV) and internal rate of return (IRR).
Payback period practice quiz: 10 questions
Test yourself with 10 multiple-choice questions. Choose an answer and press Submit to see if you are right and why. Your score appears at the end.
After 2 years you have 20,000; you need 5,000 more from year 3’s 20,000: 5,000 ÷ 20,000 = 0.25. Payback = 2.25 years.
Discounting makes later cash flows smaller (or equal at 0%), so recovery takes the same time or longer.
Payback stops counting once the cost is recovered, so it ignores later gains or losses.
Payback only tells you speed of recovery. B could still earn more over its full life.
If even all discounted cash flows cannot cover the cost, the project earns less than the discount rate.
Quiz complete
Frequently asked questions
How do you calculate the payback period?
With equal yearly cash flows, divide the investment by the yearly cash flow. With uneven flows, add them year by year until you reach the investment and add the fraction of the final year that was needed.
What is a good payback period?
Shorter is safer, but the right cutoff depends on the business and the life of the investment. Many firms set a maximum, such as 3 or 5 years, and also check NPV.
What is the discounted payback period?
The time until the present value of the cash flows equals the investment. Each cash flow is divided by (1 + discount rate) raised to its year before adding.
Can the payback period be in months?
Yes. Multiply the result in years by 12. A payback of 2.25 years is 27 months.
Why is payback not enough to choose an investment?
It ignores cash flows after the payback point and, in its simple form, the time value of money. Use it with NPV or IRR.
Sources
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