Payback Period Calculator (Simple and Discounted)
Enter the initial investment, a discount rate and up to six yearly cash flows to see how long the money takes to come back, with and without discounting. It measures recovery of cash, not accounting depreciation, and it ignores everything after the payback date.
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Formula
- Simple payback: find the first year n where the cumulative cash flow reaches the investment, then
n - 1 + (investment - cumulative before) / cash flow of year n. - Discounted payback: the same, using
cash flow / (1 + rate)^year. - NPV:
sum of cash flow / (1 + rate)^year - investment.
Assumptions: cash flows arrive evenly through each year, at most six years are used, and a payback of 0 means it was not recovered in that time.
Worked example
Investment 10,000, cash flows 4,000 for four years, discount rate 10%.
- Simple: 8,000 after two years, 2,000 left, 2,000 / 4,000 = 0.5, so 2.5 years.
- Discounted flows: 3,636.36, 3,305.79, 3,005.26, 2,732.05. After three years 9,947.41, leaving 52.59, so 3 + 52.59 / 2,732.05 = 3.02 years.
- NPV: 12,679.46 - 10,000 = 2,679.46.
Another example
Investment 50,000, cash flow 15,000 a year for five years, discount rate 8%.
- Simple payback: 50,000 ÷ 15,000 = 3.33 years.
- Discounted flows: 13,888.89, 12,860.08, 11,907.48, 11,025.45 and 10,208.75. After four years the total is 49,681.90, so 4 + 318.10 ÷ 10,208.75 = 4.03 years.
- NPV: 59,890.65 − 50,000 = 9,890.65.
Rules of thumb
Many small businesses look for payback within about two to three years, but the right threshold depends on risk and cash. A discounted payback is always longer than a simple one when the rate is above zero.
Common mistakes
- Ignoring cash flows after the payback date.
- Using profit instead of cash, or including depreciation, which is not a cash cost.
- Forgetting working capital and maintenance spend.
How it differs
Depreciation spreads a cost over years in the accounts. Payback asks when the cash returns. NPV values every cash flow, and ROI divides gain by cost.
Frequently asked questions
How is the payback period calculated?
Add up the yearly cash flows until the total reaches the initial investment, then take the fraction of the last year that was needed. An investment of 10,000 returning 4,000 a year is 8,000 after two years and needs half of the third year, so payback is 2.5 years.
What is the discounted payback period?
It does the same but first discounts each cash flow to today with the discount rate: flow / (1 + rate)^year. At 10% the four flows of 4,000 become 3,636, 3,306, 3,005 and 2,732, so the 10,000 is recovered after 3.02 years.
What if the investment is never paid back?
If the cash flows in the six years entered do not add up to the investment, the result shows 0 and the status says it was not recovered. Try adding larger or later cash flows. Payback counts the last time the running total reaches the investment, so a later loss that pushes the total back below it means the investment is not recovered.
Why show net present value?
Payback ignores everything after the payback date. NPV adds up all discounted cash flows minus the investment. In the example it is 12,679 - 10,000 = 2,679, which is positive, so the project earns more than the 10% rate.
Which payback result should I trust?
Use payback as a quick liquidity check, not as the only decision rule. The calculator assumes cash arrives evenly through each year, so the fractions are estimates.
What is the payback period formula for even cash flows?
Divide the initial investment by the yearly cash flow. An investment of 50,000 returning 15,000 a year pays back in 50,000 ÷ 15,000 = 3.33 years. For uneven cash flows add them up year by year until the total reaches the investment, as this calculator does.
What is a good payback period?
It depends on the industry, the risk and your cost of capital. As a rule of thumb many small businesses look for two to three years, while long-lived infrastructure accepts far more. A shorter payback is not better if the project earns less overall.
Payback period vs NPV vs ROI: which should I use?
Payback shows how quickly you get money back, NPV shows the value created after discounting, and ROI shows the return relative to cost. In the example payback is 3.33 years, NPV is 9,890.65 and the total undiscounted return is 25,000 on 50,000. Use all three.