Payback Period Calculator
The payback period is the time required for an investment to generate enough cash flow to recover its initial cost. It is the simplest capital budgeting metric — shorter is generally better, though it ignores the time value of money.
Tip: Payback period tells you risk exposure, not profitability. A project with a 2-year payback might return less total profit than one with a 5-year payback — always pair with NPV or IRR.
- 1Identify the initial investment amount
- 2Estimate the annual (or periodic) cash inflows the investment generates
- 3Simple payback = Initial investment / Annual cash inflow
- 4For uneven cash flows, cumulate inflows year by year until the investment is recovered
Discounted payback period
The discounted payback period accounts for the time value of money by discounting future cash flows before cumulating them. It always produces a longer payback than the simple method.
Fun Fact
Most businesses require a payback period of under 3 years for capital investments. Longer paybacks are acceptable for strategic or regulatory investments where ROI is secondary.