Payback Period Calculator
How long an investment takes to earn back what it cost: the simple payback period from yearly cash flows, the discounted payback period at a rate you choose, both interpolated within the year, and whether it pays back at all.
Result…
How it's calculated
Running total after year t = −investment + Σ cash flows to year t Payback = (last year with a negative total) + (shortfall at the start of the next year ÷ that year's cash flow) Discounted payback: the same with each cash flow ÷ (1 + rate)ᵗ NPV = Σ cash flowₜ ÷ (1 + rate)ᵗ − investment
The payback period is the time it takes for the cash an investment brings in to add up to what it cost. It is quick to understand and is often used as a first screen for equipment, energy savings or a new product: a shorter payback means the money is at risk for less time. The simple payback adds the yearly cash flows as they are; the discounted payback first shrinks each year's cash by your discount rate, because money later is worth less than money now, so it is always the same or longer. This calculator shows the running total year by year, interpolates the point within the year where it turns positive, and tells you if the project never pays back. For a full appraisal use the NPV calculator and IRR calculator too.
Your numbers, step by step
About the Payback Period calculator
This payback period calculator tells you how long an investment takes to earn back what it cost. Enter the initial investment, the net cash it brings in each year, and a discount rate. It keeps a running total from the day you invest and finds the point where it turns positive, interpolating within the year, so a result can be 3.3 years rather than just year 4. It gives the simple payback period, the discounted payback period (each year's cash first shrunk by your discount rate, since later money is worth less) and the net present value, and tells you plainly if the project does not pay back within the years you entered. Business owners use it to screen equipment, energy upgrades or new products quickly. Payback ignores cash after the payback year, so check a project with the NPV calculator and the IRR calculator too.
How to use it
- Enter the “Initial investment”, the cost paid at the start.
- List the “Yearly cash flows” from year 1 onward, separated by commas, with a minus sign for a year that costs money.
- Enter a “Discount rate (a year)”, such as your cost of capital, for the discounted payback.
- Read the simple and discounted payback periods and the running totals in the steps.
Worked example
A machine costs 30,000 and brings in 8,000, 9,000, 10,000, 10,000 and 9,000 over five years. The running total is −22,000, −13,000 and −3,000 after three years, and year 4 brings 10,000, so the simple payback is 3 + 3,000 ÷ 10,000 = 3.3 years, about 3 years 4 months. Discounted at 7%, the total after year 3 is −6,499.44 and year 4 adds 7,628.95, so the discounted payback is 3 + 6,499.44 ÷ 7,628.95 = 3.85 years. The net present value is 7,546.39.
Updated
Questions people ask
How do I calculate the payback period with uneven cash flows?
Add the cash flows year by year to the negative investment until the total turns positive. Payback = the last year with a negative total + the shortfall at the start of the next year ÷ that year's cash flow.
What is the difference between simple and discounted payback?
Simple payback adds the cash flows as they are. Discounted payback first divides each year's cash by (1 + rate) raised to the year number, so it allows for the time value of money and is always the same as or longer than the simple payback.
What is a good payback period?
There is no single standard: it depends on the industry, the risk and how long the asset lasts. Many businesses set their own maximum, and a payback well inside the asset's working life leaves room for error.
Why is payback not enough to choose between projects?
It ignores all the cash that arrives after the payback point, so a project that pays back quickly but then stops can look better than one that earns far more over time. Net present value and IRR take the whole life into account.
What does it mean if the calculator says it does not pay back?
The running total is still negative after the last year you entered. Either the project needs more years, or its cash flows never cover the cost. The result depends entirely on your forecasts, so for a large decision ask an accountant or financial adviser to review them.