Payback is a quick, intuitive screen for investments: the shorter, the less risky. Its weakness is that it ignores cash flows after the payback point; the discounted version also ignores them but at least values money correctly over time.
How to use the Payback Period Calculator
- Initial investment
- Cash flows
- Annual cash flow
- Cash flow in each year
- Discount rate
Results update as you type, and every field accepts the units shown in its menu.
How it works
Enter the initial investment, the yearly cash flow (or a list of yearly cash flows) and the discount rate.
Tips
- Use figures for the same period (a month, a quarter or a year) for every input so ratios compare like with like.
- Track the metric over time – the trend usually tells you more than a single value.
- Compare your result with industry benchmarks, which vary a lot between sectors.
- Treat the result as a starting point for a decision, then check the assumptions behind each input.
Common mistakes to avoid
- Mixing monthly and yearly numbers in the same calculation.
- Using revenue where the formula needs profit (or the other way round).
- Forgetting hidden costs such as taxes, fees, overheads or your own time.
Inputs explained
| Field | What to enter |
|---|---|
| Initial investment | Amount in your currency |
| Cash flows | Choose one: Same every year, Different each year |
| Annual cash flow | Amount in your currency |
| Cash flow in each year | A list of numbers separated by commas, spaces or new lines |
| Discount rate | In % |
Example values
How the main result changes when Initial investment changes and everything else stays at the example values above:
| Initial investment | Payback period (years) |
|---|---|
| 25,000 | 1.79 |
| 37,500 | 2.68 |
| 50,000 | 3.57 |
| 62,500 | 4.46 |
| 75,000 | 5.36 |
| 100,000 | 7.14 |
Formula
Even cash flows: payback = initial investment ÷ annual cash flowDiscounted payback: years until Σ CFₜ ÷ (1 + r)^t ≥ initial investmentWith even flows: n = −ln(1 − I × r ÷ CF) ÷ ln(1 + r)Worked example
Inputs — Initial investment: $50,000; Cash flows: Same every year; Annual cash flow: $14,000; Cash flow in each year: 10000, 12000, 15000, 18000, 20000; Discount rate: 8 %.
Results — Payback period = 3.57 years; Discounted payback period = 4.37 years; Net present value of the cash flows = $5,897.94.
Frequently asked questions
What is a good payback period?
Shorter is safer; many firms require 2–5 years depending on the project.
Why use the discounted payback period?
It accounts for the fact that future cash is worth less than cash today.
What is the main weakness of payback?
It ignores cash flows after the investment is recovered.
What formula does the Payback Period Calculator use?
Even cash flows: payback = initial investment ÷ annual cash flow.