Payback Period Calculator

How to use the payback period calculator

Enter the initial investment, a yearly discount rate and the cash the investment returns each year. Choose Fixed or growing when the first year's cash flow changes by a steady percentage, or Enter each year when the flows are uneven. Press Calculate to see the simple payback, the discounted payback, the net present value and, for ordinary cash flows, the internal rate of return, together with a year-by-year schedule.

Use net cash flow, which means the cash an investment brings in during a year minus the cash it costs to run that year, not revenue before expenses. The calculator treats each flow as arriving at the end of its year, and the investment as paid at time 0. The page opens with an example of 100,000 invested, a first-year flow of 30,000 growing 5% a year for five years, and a 10% discount rate. Any edit hides the old figures until you calculate again.

Simple payback period formula

The payback period is the time it takes for an investment's cash returns to add up to the money put in. Add the yearly net cash flows until the running total reaches the initial investment. The simple version ignores the timing value of money, so a dollar in year four counts the same as a dollar in year one.

Constant cash flow

When every year returns the same amount, divide the investment by the yearly flow. An investment of 100,000 that returns 30,000 a year pays back in 100,000 ÷ 30,000 = 3.333333 years. In whole years that is the end of year 4, because the fourth payment is the one that completes recovery. The page shows both views: the fractional figure from interpolation and the whole end-of-year result.

Uneven cash flows

When the flows differ, build a cumulative total. Find the first year in which the total reaches zero. The fraction of the year is the amount still unrecovered at the start of that year divided by that year's cash flow. This assumes the money arrives evenly through the year, which is a convention for the calculation, not a claim about when cash really arrives.

Discounted payback period formula

Discounted payback applies a discount rate first. Each year's cash flow is divided by (1 + discount rate) raised to the year number, which gives its present value, and the present values are accumulated until the total reaches the investment. The formula for year k is DCF = cash flow ÷ (1 + d)^k. At a 0% discount rate nothing is reduced, so the discounted and simple results are identical.

Choose a scenario discount rate, not a promised market return

The discount rate is the yearly return you would require, or could earn elsewhere, for tying up the money. It is an assumption you control, not a forecast and not something the page looks up. A higher rate makes later cash worth less and lengthens the payback. With 100 invested and 20 returned each year for five years, simple payback is exactly 5.000 years. At a 10% discount rate, the five discounted flows add up to only 75.82, which leaves 24.18 unrecovered, so discounted payback is not reached inside five years.

Discounting also explains why, when every flow is positive and the rate is above zero, discounted payback is never shorter than simple payback: each flow is worth less, so more of them are needed to reach the investment. A flow received in year 5 at 10% is divided by 1.1^5 = 1.6105, so a 20 flow counts as only about 12.42. Try a few rates on the same cash flows and the payback moves later as the rate rises.

Worked example with growing cash flows

Invest 100,000 and receive 30,000 in year 1, growing 5% a year, discounted at 10%. The yearly flows are 30,000.00, 31,500.00, 33,075.00, 34,728.75, 36,465.19. After year 3 the running total is -5,425, so 5,425 is still unrecovered. Year 4 brings in 34,728.75, so simple payback is 3 + 5,425 ÷ 34,728.75 = 3.156 years. Discounted, the unrecovered amount after year 3 is 21,844.48, and the answer is 3.921 years. In whole years both are recovered by the end of year 4.

The discounted flows add up to 124,517.74 over five years, so the net present value is 24,517.74. That reconciles the two answers: payback tells you when the money comes back, and net present value tells you what is left over at the end after discounting. The same setup with a 100,000 investment and 30,000 a year with no growth and no discounting pays back at 3.333 years.

To reproduce the page by hand, make a table with a column for cash flow and one for the running total. The running total of -5,425 after year 3 means the first three years returned 94,575 of the 100,000 invested. Year 4 brings in 34,728.75, which more than covers the remaining gap, so recovery happens during year 4. Repeat the same steps with the discounted column to get the discounted figure.

Irregular cash flows and later losses

Real projects rarely return the same amount every year, and some years can be negative, for example when equipment needs replacing. Enter each year when that happens. Payback finds the first year the running total reaches zero, but that first crossing is not always durable. Suppose 100 is invested and the net flows are 150, then −100, then 100. The running total is 50 after year 1, which is already above zero, so the first payback is 0.667 years. Year 2 drops it to -50, and only year 3 lifts it back to 50. The calculator flags this later reversal instead of presenting the early figure as a safe result.

A later reversal matters because payback stops counting once the first crossing happens. If a project needs a major replacement in year 2, a payback of 0.667 years would look excellent while the investor is behind again at the end of that year. The page therefore keeps going after the first crossing, reports the whole schedule and warns whenever the running total falls below zero again, so you can decide whether the early figure is still meaningful for your plan.

Payback, NPV and IRR answer different questions

Payback answers how long it takes to get the money back. It ignores everything that happens after recovery and, in its simple form, the timing of cash inside the horizon. Net present value adds up all discounted flows and shows the value left after discounting, and the internal rate of return is the single yearly rate at which the discounted flows exactly equal the investment. For the uneven example with flows of 5,000, 25,000, 35,000, 40,000, 30,000, 10,000, simple payback is 3.875 years, discounted payback is 5.452 years (end of year 6) and the IRR is 10.9637%.

The page shows the IRR only for conventional patterns, an outflow at time 0 followed by inflows that are never negative. Other patterns can have no unique IRR, so the page says so and leaves it out instead of guessing. No single measure decides whether an investment is good. To compare against operating costs, find operating break-even sales; to test dated cash flows with a financial calculator, evaluate periodic cash flows.

Payback period questions

What is the payback period?

It is the time it takes for an investment's net cash returns to recover the initial outlay, within the horizon you modelled. It is measured in years, and it says nothing about what happens after the money is back.

How is discounted payback different?

It discounts each year's cash before adding it up, so it is longer than simple payback when the rate is above zero and the flows are positive. At a 0% discount rate the two results are the same.

Why is the payback a fractional year?

The page interpolates uniformly inside the recovery year. It also shows the whole end-of-year result, the first year-end at which the total is at least zero. The two views describe the same recovery, one with a convention about timing inside the year and one without.

What if payback never occurs?

The page reports not recovered within the years entered and shows how much is still unrecovered. It does not extrapolate beyond your cash flows. Extend the years, add expected later receipts or lower the discount rate to test whether recovery appears with different assumptions.

Does a short payback mean an investment is good?

No. Payback ignores risk and cash after recovery. Review net present value, IRR, your assumptions and any later losses as well, and compare the result with the horizon over which you actually need the money back.

Related next steps

For a property, model a rental property's full cash flows before judging recovery time. If you are weighing a project against a sales target, find operating break-even sales first, then return here to test how long the upfront investment takes to recover under cautious and optimistic cash flows.