About the Payback Period Calculator
The payback period is the time it takes for an investment’s cash inflows to repay the money you put in. It is one of the quickest ways to screen projects such as new equipment, solar panels, software, a marketing program or an acquisition: the shorter the payback, the sooner your cash is back at work and the lower the risk.
Enter the upfront cost, the expected annual cash inflow, an optional yearly growth rate and your discount rate. The calculator returns the simple payback period, the discounted payback period (which accounts for the time value of money), and the net present value over the horizon you choose, with a chart of cumulative cash flow.
Cash flows are assumed to arrive evenly through each year, so a fractional payback is interpolated within the year it is reached. Payback ignores cash after the break-even point, so pair it with NPV or IRR before committing to a large decision.
With the default inputs, the simple payback period is 4.17 years. Change any value above to recalculate instantly.
How to use the payback period calculator
- 1Enter the total upfront cost of the investment.
- 2Enter the net cash it will generate in its first year.
- 3Add a growth rate if cash flows will rise (or fall) each year.
- 4Enter your discount rate and how many years to analyse.
- 5Compare simple and discounted payback against your maximum acceptable payback.
Formula and method
The simple payback period adds up each year’s cash inflow until the running total equals the initial investment. When recovery happens part-way through a year, the fraction is the unrecovered amount at the start of that year divided by that year’s cash flow, assuming cash arrives evenly. With constant cash flows this reduces to investment ÷ annual cash flow.
The discounted payback period does the same with each cash flow divided by (1 + r)ᵗ, so later dollars count for less. It is always longer than simple payback when r is positive. NPV is the sum of all discounted cash flows over the horizon minus the investment. Cash flows grow by the growth rate each year after year 1.
- CFₜ
- Cash inflow in year t = CF₁ × (1 + g)^(t−1)
- r
- Discount rate (cost of capital)
- g
- Yearly growth rate of cash flows
- t
- Year number
Worked examples
$50,000 machine saving $12,000 a year
With level savings, simple payback is $50,000 ÷ $12,000 = 4.17 years. Discounting each year at 8% slows recovery to about 5.28 years. Over 10 years the discounted cash flows exceed the cost by about $30,521 (the NPV).
Growing cash flows
Cash flows of $20,000, $22,000, $24,200 and $26,620 total $92,820 after four years; the remaining $7,180 is recovered 0.25 of the way through year 5 ($29,282), giving 4.25 years. Because growth and discount rates are both 10%, each discounted flow is $18,182, so discounted payback is exactly 5.5 years.
Never recovered once discounted
Ten years of $10,000 exactly returns the $100,000 cost, so simple payback is 10 years. At a 12% discount rate those flows are worth only about $56,502 today, leaving an NPV of about −$43,498, so the project never pays back on a discounted basis within the horizon.
Frequently asked questions
What is a good payback period?+
There is no universal cut-off. Many small businesses want equipment and efficiency projects to pay back within 2–5 years; longer-lived assets such as buildings or solar can justify longer paybacks if cash flows are reliable.
What is the difference between simple and discounted payback?+
Simple payback treats a dollar received in year five the same as one today. Discounted payback reduces future cash flows by your discount rate first, so it is longer and better reflects the cost of tying up money.
What are the limitations of the payback period?+
It ignores every cash flow after the break-even point and does not measure total profitability. A project with a slightly longer payback can create far more value, so use NPV or IRR alongside it.
How do I calculate payback with uneven cash flows?+
Add up cash flows year by year until the cumulative total turns positive. Payback equals the full years before that point plus the remaining unrecovered amount divided by the cash flow of the recovery year.
What discount rate should I use?+
Use your cost of capital — for example, the interest rate on the loan that funds the project, or your weighted average cost of capital (WACC) if the business is funded with both debt and equity.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.