How to use the payback period calculator
- Enter the initial investment: everything you spend up front.
- Choose whether the cash flows are the same every year or different each year.
- For even cash flows, enter the cash flow each year and how many years to project. For uneven ones, type one amount per year, year 1 first, separated by spaces or new lines.
- Enter a discount rate, such as your cost of borrowing or the return you could get elsewhere. Use 0 to skip discounting.
- Read the simple payback, the discounted payback, and the year-by-year table.
Cash flow here means the extra money the investment brings in each year after its running costs: added profit, or savings such as lower energy bills.
How the payback period is calculated
The calculator adds up the cash flows year by year, starting from minus the investment. Payback falls in the year the running total crosses zero. To get the part-year, it assumes the money arrives evenly through that year. Discounted payback does the same with each year's cash flow shrunk to today's value at rate r, so it is always longer than the simple payback when r is above zero.
Worked example
The defaults are a $50,000 investment returning $12,000 a year for 10 years, with an 8% discount rate:
- Simple payback: $50,000 ÷ $12,000 = 4.17 years, about 4 years 2 months
- Discounted cash flows: $11,111.11 in year 1, $10,288.07 in year 2, $9,525.99, $8,820.36 and $8,167.00 in years 3 to 5
- After 5 years the discounted total is still $2,087.48 short. Year 6 brings in $7,562.04 in today's money, so discounted payback is 5 + 2,087.48 ÷ 7,562.04 = 5.28 years
- Over all 10 years the net present value is $30,520.98
Switch to different each year to see the default uneven series of $10,000, $12,000 and then $15,000 a year. The running total reaches −$13,000 after year 3, and year 4 brings $15,000, so payback is 3 + 13,000 ÷ 15,000 = 3.87 years.
Simple vs. discounted payback
| Simple payback | Discounted payback | |
|---|---|---|
| Uses | Raw cash flows | Cash flows in today's money |
| Answer for the example | 4.17 years | 5.28 years at 8% |
| Accounts for the time value of money | No | Yes |
| Best for | Quick screening, short projects | Comparing projects, longer horizons |
Both versions share one blind spot: they ignore everything after the payback year. A project that pays back in 3 years and then stops can look better than one that pays back in 4 years and keeps earning for 20. Use payback as a risk check, how long your money is exposed, and pair it with net present value or the IRR calculator to judge total profitability.
Frequently asked questions
What is a good payback period?
It depends on the risk and the life of the investment. Many small businesses look for a few years on equipment, while long-lived assets like solar panels or buildings can justify longer. A useful rule is that payback should come well before the end of the asset's useful life.
Why is the discounted payback longer?
A dollar received in five years is worth less than a dollar today, because you could invest today's dollar in the meantime. Discounting shrinks every future cash flow, so it takes longer for the shrunken amounts to add up to the investment.
What if the investment never pays back?
The calculator shows "Not within" the number of years you entered. Check that the cash flows are realistic, extend the years to project, or treat it as a sign the investment doesn't earn its cost back over its life.
Should I include depreciation in the cash flows?
No. Depreciation is an accounting entry, not cash leaving the business. Use the actual cash the investment saves or earns each year. Depreciation can still matter indirectly, because it lowers taxes; see the depreciation calculator.
Related calculators
- ROI Calculator — Return on investment as a percentage, the gain or loss, and the annualized ROI from a length or two dates.
- IRR Calculator — Internal rate of return, NPV and payback period for an investment and a series of yearly or monthly cash flows.
- Present Value Calculator — What a future sum, or a stream of regular payments, is worth today at a given discount rate.
- Depreciation Calculator — Depreciation schedules by straight-line, declining balance or sum-of-the-years' digits, with book value each year.
Results are estimates for educational purposes and are not financial, tax or legal advice. See our disclaimer.