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Payback Period Calculator: Simple and Discounted
Enter the upfront cost and the cash you expect in each of up to six periods. The calculator finds how long it takes to recover the investment, with and without discounting future cash.
How the payback period is calculated
The payback period is the time needed for cumulative cash inflows to equal the initial investment. With uneven cash flows you add the periods one by one until the running total reaches the cost. In the period where it crosses, the fraction of that period is:
Payback = full periods before recovery + (amount still unrecovered ÷ cash flow in the recovery period)
For the default example the running total is 3,000, then 7,000, then 11,000. Recovery happens in period 3, with 3,000 still to recover after period 2, so payback is 2 + 3,000 ÷ 4,000 = 2.75 periods.
Why discounted payback is longer
Simple payback treats a unit of cash in year four as equal to one received today. Discounted payback first converts each cash flow to present value with CF ÷ (1 + r)t, then runs the same cumulative test. Because every discounted amount is smaller than its original, the discounted payback is never shorter than the simple one, and it may not be reached at all if the discount rate is high.
The net present value shown is the sum of all discounted cash flows within the six periods minus the investment. A positive figure means the project earns more than the discount rate over those periods.
Reading the result and its limits
- Cash after payback is ignored. A project with a 3-year payback and large later cash flows can be worth more than one with a 2-year payback that stops paying.
- Only six periods are modelled. If recovery has not happened by then, extend your analysis by hand or use a longer horizon.
- Period length matters. The rate and the cash flows must use the same unit, for example annual rate with yearly cash flows.
- Timing within a period is assumed to be at the end, and cash is assumed to arrive evenly enough for the fractional calculation to make sense.
Payback is a liquidity and risk screen, not a full valuation. Use it alongside NPV or internal rate of return, and treat forecasts with caution because they are estimates.
Entering your numbers
Enter the initial investment as a positive number and each later cash flow as the net amount for the period: revenue or savings minus running costs. A negative number is allowed for a period with a net outflow, such as a major repair. Unused periods should be 0. If you are unsure of the discount rate, try two values to see how sensitive the discounted payback is.
Worked example
A machine costs 10,000 and is expected to bring in 3,000, 4,000, 4,000 and 3,000 over four years. The required return is 10% per year.
Inputs
| Initial investment | 10000 |
|---|---|
| Discount rate per period | 10 % |
| Cash flow, period 1 | 3000 |
| Cash flow, period 2 | 4000 |
| Cash flow, period 3 | 4000 |
| Cash flow, period 4 | 3000 |
| Cash flow, period 5 | 0 |
| Cash flow, period 6 | 0 |
Result
Simple payback. Discounted payback: 3.47 periods.
| Simple payback period | 2.75 periods |
|---|---|
| Discounted payback period | 3.47 periods |
| Present value of the cash flows | 11,087.36 |
| Net present value over six periods | 1,087.36 |
| Total undiscounted cash flow | 14,000.00 |
Cumulative position by period (negative means not yet recovered)
| Period | Cash flow | Cumulative (simple) | Discounted cash flow | Cumulative (discounted) |
|---|---|---|---|---|
| 1 | 3,000.00 | -7,000.00 | 2,727.27 | -7,272.73 |
| 2 | 4,000.00 | -3,000.00 | 3,305.79 | -3,966.94 |
| 3 | 4,000.00 | 1,000.00 | 3,005.26 | -961.68 |
| 4 | 3,000.00 | 4,000.00 | 2,049.04 | 1,087.36 |
| 5 | 0.00 | 4,000.00 | 0.00 | 1,087.36 |
| 6 | 0.00 | 4,000.00 | 0.00 | 1,087.36 |
Financial disclaimer: Results are estimates for planning and education. They are not financial, tax or legal advice. Fees, taxes, rates and rules vary by lender, product and country, so confirm figures with your provider or a qualified adviser before making decisions.
Frequently asked questions
What is a good payback period?
There is no universal answer. It depends on the industry, the risk and the organisation's own cut-off. Many firms set a maximum payback and also check NPV, because payback ignores cash flows after recovery.
What is the difference between simple and discounted payback?
Simple payback adds raw cash flows. Discounted payback converts each cash flow to present value first, so it accounts for the time value of money and is always equal to or longer than simple payback.
How do I calculate payback with uneven cash flows?
Accumulate the cash flows period by period. In the period where the total passes the investment, divide the amount still unrecovered by that period's cash flow and add the result to the number of full periods before it.
What discount rate should I use?
Use your required return or cost of capital for a project of similar risk. The calculator does not set it for you, so enter the rate that applies to your situation.
Can payback be negative or undefined?
It is undefined when cumulative cash never reaches the investment in the periods entered. The calculator then says the investment is not recovered rather than showing a misleading number.
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References and sources
- Brealey, Myers and Allen, Principles of Corporate Finance: chapters on net present value and the payback rule.
- CFA Institute curriculum: capital budgeting, payback and discounted payback. Link