Payback Period Calculator
Calculate how long an investment takes to recover its initial cost, using both simple payback and discounted payback which accounts for the time value of money.
⏱️ Investment Analysis📐 Payback = period when cumulative cash flow first turns positive💼 Business
Initial investment
Discount rate for discounted payback (%)
Cash flows per period (comma separated)
Please enter valid values.
Formula & Reference
| Variable | Symbol | Formula | Units |
|---|---|---|---|
| Payback Period Calculator | — | Payback = period when cumulative cash flow first turns positive | periods |
Step-by-Step Examples
Example 1
Standard Payback
Invest 100,000, returns of 30,000 / 35,000 / 40,000 / 45,000, 10% discount rate.
- Cumulative: 30,000 / 65,000 / 105,000
- Breakeven occurs during period 3
- Need 35,000 of period 3's 40,000 → 0.875
- Simple payback = 2.88 periods
✓ 2.88 periods simple
Example 2
Discounting Extends It
Same project, discounted at 10%.
- Discounted: 27,273 / 28,926 / 30,053 / 30,735
- Cumulative: 27,273 / 56,199 / 86,252 / 116,987
- Breakeven occurs during period 4
- Discounted payback = 3.45 periods
✓ 3.45 periods discounted
Example 3
Never Pays Back
Invest 300,000, returns of 50,000 annually for four years.
- Cumulative after 4 periods = 200,000
- Never reaches the 300,000 investment
- Payback not achieved in the modelled horizon
✓ Not reached within 4 periods
Real-World Applications
Liquidity Focus
Payback answers how quickly capital is recovered, which matters most for cash-constrained businesses.
Simple Screening
Its intuitive appeal makes payback a common first filter before more rigorous NPV analysis.
Risk Proxy
Shorter payback implies less exposure to forecast error in distant periods, acting as a rough risk screen.
Equipment Purchases
Payback is widely used for smaller operational decisions where full DCF analysis would be disproportionate.
Common Mistakes to Avoid
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Using payback as the sole decision criterion
It ignores all cash flow after breakeven. A project paying back in two years then stopping looks better than one paying back in three then generating for a decade.
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Forgetting the time value of money
Simple payback treats a dollar in year four as equal to one today. Discounted payback corrects this and always produces a longer figure.
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Comparing payback across different project lifespans
A short payback on a short-lived asset is not comparable to the same payback on one generating returns far longer.
Frequently Asked Questions
What is the payback period? ▾
The time required for cumulative cash inflows to equal the initial investment — the point at which the capital outlay is recovered.
What is discounted payback? ▾
The same calculation applied to cash flows discounted to present value, which accounts for the time value of money and always yields a longer period.
What is a good payback period? ▾
It depends on the asset and industry. Technology investments are often expected to pay back within two to three years, while infrastructure may run far longer.
Why is payback criticised? ▾
It ignores all cash flow beyond breakeven and, in its simple form, the time value of money — so it can favour short-lived projects over more valuable long-lived ones.
Should I use payback or NPV? ▾
NPV for the investment decision, payback as a supplementary liquidity and risk check. They answer different questions and work best together.