Payback Period Calculator
Payback Period Calculator
How many years an investment takes to earn back what it cost — simply, from the cash it brings in, and discounted, counting later money for less — with the cumulative cash flow charted year by year.
Payback period
$10,00,000 invested, $3,00,000 a year for 6 years, discount rate 10%
Simple and discounted payback
- I
- the investment at the start
- cash in year k
- C × (1 + g)k−1; for discounted payback, divided by (1 + r)k
- k
- found in closed form: (1 + g)k ≥ 1 + I × g ÷ C, or k ≥ I ÷ C when g = 0
Worked example
$10,00,000 invested, $3,00,000 a year for 6 years, discount rate 10%
After 3 years: 9,00,000 back, $1,00,000 still to recover
Year 4 brings 3,00,000: 1,00,000 ÷ 3,00,000 = 0.33 of a year
Simple payback = 3 + 0.33 = 3.33 years
Discounted at 10%: after 4 years $9,50,960 recovered in today's money; year 5 is worth $1,86,276, so discounted payback = 4.26 years
Net present value over 6 years = $3,06,578
The example at different discount rates
| Discount rate | Discounted payback | NPV over 6 years |
|---|---|---|
| 0% | 3.33 years | $8,00,000 |
| 8% | 4.03 years | $3,86,864 |
| 10% | 4.26 years | $3,06,578 |
| 12% | 4.52 years | $2,33,422 |
| 15% | 4.96 years | $1,35,345 |
What payback tells you, and what it ignores
The payback period is the time an investment takes to return its cost in cash. Add up the cash it brings in year by year until the total reaches the outlay: $10,00,000 returning $3,00,000 a year is back after three years and a third, 3.33 years. The fraction assumes the year’s cash arrives evenly; if it all comes at the year end, payback is really the whole year, 4. Use cash flow after tax and running costs, not accounting profit, which is reduced by depreciation that is not a cash payment.
Simple payback counts a rupee in year four the same as one today. Discounted payback fixes that by dividing each year’s cash by (1 + r) raised to the year before adding it up. At 10% the example takes 4.26 years, and if the discounted cash never reaches the outlay within the life, the investment does not earn your required return at all.
Both versions share one blind spot: they stop at the break-even year. Everything after it — here $8,00,000 of further cash over years 4 to 6 — makes no difference to the answer, so a project that pays back quickly and then stops can beat one that pays back a little later and earns for another decade. Payback also has no rule for the right cut-off: two or three years is a company’s own choice, not a finance standard. That is why corporate-finance textbooks treat it as a rough screen for risk and liquidity, and use net present value, which counts every year’s cash, to decide. The page shows the NPV over the life you enter beside the payback, and the chart marks where each cumulative line crosses zero.
For the return on an investment as a percentage, see the ROI calculator; to value a single future sum today, the present value calculator; for the sales a business needs to cover its fixed costs, the break-even calculator. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
How do you calculate the payback period?
Divide the investment by the equal yearly cash inflow: 10,00,000 ÷ 3,00,000 = 3.33 years. With uneven cash, add up the years until the total reaches the investment and take the fraction of the last year.
What is discounted payback?
The same count after each year’s cash is divided by (1 + discount rate)year. In the example at 10% it is 4.26 years instead of 3.33.
Why does payback ignore later cash flows?
By design it only asks when the money comes back, so cash after that year does not affect it. Net present value counts all of it, which is why it is the better test of whether a project is worth doing.
What is a good payback period?
There is no standard. Businesses set their own cut-off, often a few years, depending on risk and how soon they need the cash back.
Related calculators
References
- Brealey RA, Myers SC, Allen F. Principles of Corporate Finance. McGraw-Hill. Chapter “Net Present Value and Other Investment Criteria”: the payback rule, discounted payback, and why both ignore cash flows after the cut-off date.