Work out how long an investment takes to repay itself, discounted or not.
The payback period tells you how long it takes to get your investment back. Simple payback ignores the time value of money — a dollar received in year 5 is counted the same as one received today. Discounted payback corrects for this: future cash flows are reduced to their present value before being accumulated. Discounted payback is therefore always equal to or longer than simple payback. Both metrics are most useful as a risk screen: shorter payback = less exposure to uncertainty. Neither measures profitability — a project could have a fast payback but a poor total return. Use IRR and NPV for a complete picture.
Simple payback
Payback = Initial investment / Annual cash flow (uniform flows only)
Discounted payback
Discounted payback: find t where Σ PV(cash flows) = Initial investment
It depends on the industry and risk tolerance. Equipment purchases in manufacturing often require payback within 3–5 years. Technology investments may need to pay back in 12–18 months due to rapid obsolescence. There is no universal rule — compare against your company's hurdle and against competing investment options.
Discounting shrinks the present value of future cash flows. Each year's contribution toward recovering the investment is smaller in PV terms than its face value, so it takes longer to accumulate enough present value to equal the initial outlay.
Payback ignores cash flows after the payback date — a project that pays back in year 3 but earns nothing after that is treated equally to one that pays back in year 3 and then earns large returns for 15 more years. It also ignores profitability. Use it as a quick liquidity screen, not as a primary decision criterion.
This calculator assumes annual periods. For monthly or quarterly cash flows, convert: enter the per-period cash flow in the 'annual' field and interpret the result as the number of periods (not years) to pay back.