How to use the Payback Period Calculator
- Enter the initial investment.
- Enter the expected cash inflow for each of the next five years.
- Enter a discount rate for the discounted payback.
- Read the simple and discounted payback periods.
Formula used
Payback = full years before recovery + (unrecovered amount at start of that year ÷ that year’s inflow). For discounted payback each inflow is divided by (1 + rate)^year first.
Worked example
Here is the Payback Period Calculator worked through with the example values shown above, so you can check each step by hand.
| Inputs | |
|---|---|
| Initial investment | $10,000 |
| Cash inflow, year 1 | $3,000 |
| Cash inflow, year 2 | $3,500 |
| Cash inflow, year 3 | $4,000 |
| Cash inflow, year 4 | $4,000 |
| Cash inflow, year 5 | $4,000 |
| Discount rate (per year) | 8 % |
| Result | |
| Simple payback period | 2.88 years (2 years 11 months) |
| Discounted payback period | 3.36 years (3 years 4 months) |
| Total inflows over 5 years | $18,500 |
How payback is worked out
With a $10,000 investment and inflows of $3,000, $3,500 and $4,000, the running total after two years is $6,500. The remaining $3,500 is recovered during year three, which brings in $4,000, so payback is 2 + 3,500 ÷ 4,000 = 2.88 years (2 years 11 months).
The calculation assumes cash arrives evenly through each year, so the fraction of the year is a straight-line estimate.
Discounted payback
Money received later is worth less today. Discounting each inflow at 8% before adding them up, the same project takes 3.36 years (3 years 4 months). At a 15% rate the discounted payback becomes 3.92 years (3 years 11 months). The higher the rate, the longer the wait.
Discounted payback is always longer than simple payback when the rate is above zero.
When the investment does not pay back
If the inflows over the five years do not reach the cost, the calculator says so. With a $30,000 investment and the same inflows totalling $18,500, the result is "not recovered within 5 years". That does not necessarily mean the project is bad, only that it is not recovered within the window analysed.
Extend the analysis with longer forecasts, or use the NPV and IRR calculators, which account for all cash flows.
Strengths and limits
Payback is simple, easy to explain and highlights liquidity risk. It ignores everything after the payback date, so a project that pays back slowly but earns for decades can look worse than it is. Simple payback also ignores the time value of money.
Use it as a screen alongside net present value and IRR, not as the only test. Cash flows should be after tax and include running costs, not just revenue.
Frequently asked questions
What is a good payback period?
Shorter is better. Many firms use a cut-off such as 2 to 5 years, depending on the industry and risk.
What is the difference between simple and discounted payback?
Simple payback adds raw cash flows. Discounted payback first reduces each by the discount rate, so it is longer.
Does payback consider profit after payback?
No. That is its main weakness.
What if the inflows are the same every year?
Divide the investment by the yearly inflow. Enter the same amount for each year to use the calculator.
Can I use it for a personal purchase?
Yes. For example, solar panels with yearly electricity savings as the inflows.
Why only five years?
To keep the form simple. If the cost is not recovered by year five, the result says so.
This calculator gives estimates for information only. Actual figures from a bank, employer, tax authority or doctor may differ. It is not financial, tax, legal or medical advice.