Payback Period Calculator

What this payback calculator does

The payback period is the time needed for cumulative cash flows to recover an initial investment. This calculator supports a fixed cash flow that grows or shrinks each year, or a separate cash flow for each year. It also reports the discounted payback period and the cash flow return rate.

Payback is easy to interpret, but it ignores what happens after the break-even point and does not account for risk. Use it with net present value, internal rate of return, and other measures when evaluating a project.

How to use this calculator

1. Choose Fixed Cash Flow for a repeating payment that changes by a constant rate each year.
2. Enter the initial investment, annual cash flow, annual increase or decrease, number of years, and discount rate.
3. For uneven payments, choose Irregular Cash Flow and enter the cash flow for each year.
4. Click Calculate to see the payback period, discounted payback period, return rate, and schedule.

The default fixed example invests $100,000, receives $30,000 in year one, increases the cash flow by 5% per year, and uses a 10% discount rate.

Payback formulas

For a flat cash flow:

Payback period = Initial investment / Cash flow per year

For a cash flow that grows at a constant rate g:

Payback period = ln(1 + Initial investment × g / Cash flow) / ln(1 + g)

The discounted payback period discounts each cash flow before comparing the cumulative value with the initial investment. It is usually longer than the simple payback period because future dollars are worth less today.

The cash flow return rate is the internal rate of return that makes the net present value of the entered cash flows equal to zero. It is shown as a percentage per year.

What the results include

• Payback period: the time needed to recover the initial investment from undiscounted cash flows.
• Discounted payback period: the time needed when future cash flows are discounted.
• Cash flow return rate: the internal rate of return for the entered schedule.
• Investment schedule: yearly cash flow, net cash flow, discounted cash flow, and net discounted cash flow.

Assumptions and limitations

The fixed cash flow version assumes the cash flow changes by the same percentage every year. The irregular version uses the amounts you enter and treats blank years as zero. Both versions assume the initial investment occurs at the start and cash flows occur at the end of each year. Taxes, inflation, financing costs, and risk are not modeled.

The payback period can extend beyond the number of years in the schedule because it is based on the cash flow pattern, while the schedule is limited to the years you enter.

Frequently asked questions

What is a good payback period?

A shorter payback period recovers the investment sooner, but there is no universal threshold. The right target depends on the project's risk, useful life, and cost of capital.

Why is discounted payback longer?

Discounting reduces the present value of future cash flows. As a result, it usually takes longer for the discounted cash flows to equal the initial investment.

Does payback include cash flows after the break-even point?

No. The payback period stops at the break-even point, so it does not show the total profit or loss over the full project life.

Can the cash flow return rate be negative?

Yes. If the entered cash flows do not recover the initial investment, the internal rate of return can be negative. If no rate solves the cash flows, the result is shown as not available.

Source

References:

• Investor.gov — Return on Investment (ROI)
• Consumer Financial Protection Bureau — Saving

Disclaimer

This calculator is for informational and educational purposes only. It is not financial advice. Project cash flows are estimates, and actual results may differ.