Payback Period Calculator
Work out how long an investment takes to repay itself, discounted or not.
Inputs
Set to 0 to skip discounted payback. Use your cost of capital.
Simple Payback Period
4.17years
Years to recover initial investment, ignoring the time value of money.
Discounted Payback Period
5.28years
Accounts for the time value of money. Always ≥ simple payback.
Step by step
Initial investment
= $50,000
Simple payback period
= 4.17 years
Time to recover the initial investment using undiscounted cash flows.
Discounted payback at 8%
= 5.28 years
Longer than simple payback because future cash flows are worth less in today's dollars.
Payback Schedule
| Year | Cash Flow | PV of Cash Flow | Cumulative (Simple) | Cumulative (Discounted) |
|---|---|---|---|---|
| 1 | $12,000.00 | $11,111.11 | $12,000.00 | $11,111.11 |
| 2 | $12,000.00 | $10,288.07 | $24,000.00 | $21,399.18 |
| 3 | $12,000.00 | $9,525.99 | $36,000.00 | $30,925.16 |
| 4 | $12,000.00 | $8,820.36 | $48,000.00 | $39,745.52 |
| 5 | $12,000.00 | $8,167.00 | $60,000.00 | $47,912.52 |
How it works
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.
Formulas
Simple payback
Payback = Initial investment / Annual cash flow (uniform flows only)
Discounted payback
Discounted payback: find t where Σ PV(cash flows) = Initial investment
- C_t
- Cash flow in year t
- r
- Discount rate
- I_0
- Initial investment
Frequently Asked Questions
What is a good payback period?
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.
Why is discounted payback always longer than simple payback?
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.
What are the limits of payback period as a capital budgeting tool?
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.
Can I use this for non-annual cash flows?
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.