Payback Period Calculator
Simple payback ignores the time value of money; at 8% it takes 0.7 years longer.
How the payback period calculation works
Simple payback is investment ÷ yearly cash
A $40,000 machine that saves $12,000 a year pays back in $40,000 ÷ $12,000 = 3.33 years.
Discounted payback shrinks later years first
Each year's cash is divided by (1 + rate)^year. At 8%, year 1's $12,000 is worth $11,111.11 today.
Add discounted years until you pass the cost
The year in which the running total crosses the investment is the payback year. The fraction is how far into that year you get.
Shorter is safer, but it is not the whole story
Payback ignores cash after the break-even point. Use NPV or IRR to compare total value.
Worked example. A $40,000 investment that brings in $12,000 a year pays back in 3.33 years. Discounted at 8%, it takes 4.03 years.
Payback Period FAQ
How do you calculate the payback period?
Divide the initial investment by the cash it brings in each year. $40,000 ÷ $12,000 a year = 3.33 years. For uneven cash flows, add years until the total passes the cost.
What is the payback period?
The time it takes for an investment's cash inflows to add up to what it cost. It is usually stated in years. It answers "when do I get my money back?", not "how much will I make?".
What is the payback period formula?
With even yearly cash: payback period = initial investment ÷ annual cash inflow. With uneven cash: payback = years before the break-even year + (cost still unrecovered at the start of that year ÷ cash in that year).
How do you calculate payback with uneven cash flows?
Keep a running total of cash in, year by year. A $40,000 project bringing in $10,000, $15,000 and $20,000 has $25,000 back after two years. The remaining $15,000 is 0.75 of year 3's $20,000, so payback is 2.75 years.
What is a discounted payback period?
The same idea, but each year's cash is first discounted to today's value. It is always longer than simple payback when the rate is above zero.
What is the discounted payback period formula?
Discount each year's cash: cash ÷ (1 + r)^year, then add years until the running total passes the cost. In the example at 8%, the first three years bring back $30,925.16. Year 4 adds $8,820.36, and the $9,074.84 still needed is 1.03 of that, so payback is 4.03 years. For even cash there is a shortcut: −ln(1 − investment × r ÷ cash) ÷ ln(1 + r), which also gives 4.03.
How do you calculate payback period in Excel?
For even cash, simple payback is =investment/cash, for example =40000/12000. For discounted payback, =NPER(8%, 12000, -40000) returns about 4.03 years. Enter the investment as a negative number. For uneven cash, put each year's cash in a column, add a running-total column, and find the year where it turns positive.
What is a good payback period?
There is no single cutoff. It depends on how long the asset lasts, how risky the cash is and what else you could do with the money. A payback well inside the asset's useful life is a basic test. Many owners set their own maximum and compare projects against it.
What are the limits of the payback method?
It ignores cash after payback and, in the simple version, the time value of money. Two projects with the same payback can have very different total returns.