What is the payback period?
Enter what a project costs and the cash it brings in each year to see how long it takes to earn its cost back. Add a discount rate to see the discounted payback period and the net present value too.
- Payback period
- 4
An investment of $16,000.00 pays back in 4 years.
- Discounted payback period
- 5.05
- Cash flows minus investment
- $10,000.00
- Net present value
- $2,835.62
Payback period: 4. An investment of $16,000.00 pays back in 4 years.
The results are estimates for information only. They are not financial, tax, or legal advice. Check the numbers with your lender or a qualified professional before you decide. Terms of use
How to calculate
Computes the payback period of a project, the time until its cash flows repay the initial cost, and the discounted payback period at a discount rate.
Example with the default inputs (Initial investment $16,000.00, Cash flow each year [2,000, 4,000, 5,000, 5,000, 5,000, 5,000], Discount rate 9%): An investment of $16,000.00 pays back in 4 years.
Method: Payback period = the year before the running total reaches the investment + the part still owed ÷ that year’s cash flow. The discounted payback does the same with each flow divided by (1 + rate)^year.
- The investment is paid at the start; each cash flow comes in evenly through its year.
- The payback period is the first time the running total reaches the investment, even if a later year is negative.
- Arithmetic is exact on the typed decimals; years show to 2 decimals and money to the cent, halves up.
Worked examples
Each example is checked against the calculator on every build.
- Initial investment $16,000.00, Cash flow each year 2,000, 4,000, 5,000, 5,000, 5,000, 5,000, Discount rate 9% gives Payback period 4, Discounted payback period 5.048876, Cash flows minus investment $10,000.00.Source: OpenStax, Principles of Finance, 16.4 Alternative Methods (payback period and discounted payback period: $16,000 project, cash flows 2,000, 4,000, 5,000 × 4, 9% cost of funds). https://openstax.org/books/principles-finance/pages/16-4-alternative-methods: payback at the end of year 4
- Initial investment $10,000.00, Cash flow each year 3,000, 3,000, 3,000, 3,000, 3,000, Discount rate 0% gives Payback period 3.333333, Discounted payback period 3.333333.Source: OpenStax, Principles of Finance, 16.4 Alternative Methods (payback period and discounted payback period: $16,000 project, cash flows 2,000, 4,000, 5,000 × 4, 9% cost of funds). https://openstax.org/books/principles-finance/pages/16-4-alternative-methods
- Initial investment $50,000.00, Cash flow each year 10,000, 15,000, 20,000, 25,000, Discount rate 12% gives Payback period 3.2, Net present value $1,010.04.Source: OpenStax, Principles of Finance, 16.4 Alternative Methods (payback period and discounted payback period: $16,000 project, cash flows 2,000, 4,000, 5,000 × 4, 9% cost of funds). https://openstax.org/books/principles-finance/pages/16-4-alternative-methods
- Initial investment $1,000.00, Cash flow each year 600, -200, 700, Discount rate 0% gives Payback period 2.857143.Source: OpenStax, Principles of Finance, 16.4 Alternative Methods (payback period and discounted payback period: $16,000 project, cash flows 2,000, 4,000, 5,000 × 4, 9% cost of funds). https://openstax.org/books/principles-finance/pages/16-4-alternative-methods
How it works
With the initial investment I paid at the start and the cash flows CF₁, CF₂, … for years 1, 2, …:
- Take each year’s cash flow off what is still owed, starting from I.
- In the first year k whose cash flow is at least what is still owed (and more than 0), the payback period is (k − 1) + still owed ÷ CFₖ.
The discounted payback period does the same with each cash flow divided by (1 + r)ᵏ, where r is the discount rate in percent ÷ 100 and k the year.
The page also shows:
- Cash flows minus investment = CF₁ + CF₂ + … − I
- Net present value = CF₁ ÷ (1 + r) + CF₂ ÷ (1 + r)² + … − I
Rules:
- The investment is more than $0 and at most $1 trillion. Enter 1 to 50 yearly cash flows; a cash flow may be negative.
- The discount rate is optional, from 0% to 100%; empty counts as 0%.
- If the cash flows never repay the investment, there is no answer. If only the discounted flows never repay it, the page says so and shows the simple payback period.
- The simple payback arithmetic is exact on the decimals you type. Each discount factor (1 + r)ᵏ is a power, worked in floating point. Years show to 2 decimals and money to the cent, with halves rounded up (away from 0).
Assumptions
- The investment is paid at the start (year 0), and each cash flow comes in evenly through its year, so part of a year counts in proportion.
- The payback period is the first time the running total reaches the investment, even if a later year has a negative cash flow.
Worked examples by hand
The OpenStax project. I = $16,000 and the cash flows are 2,000, 4,000, 5,000, 5,000, 5,000 and 5,000. Still owed after each year: 14,000, 10,000, 5,000, then year 4’s 5,000 covers the last 5,000, so the payback period is 3 + 5,000 ÷ 5,000 = 4 years. At 9%, the discounted flows are 1,834.86, 3,366.72, 3,860.92, 3,542.13, 3,249.66 and 2,981.34. After 5 years 145.72 is still owed, so the discounted payback period is 5 + 145.72 ÷ 2,981.34 = 5.05 years.
Even cash flows. I = $10,000 and $3,000 a year for 5 years. After 3 years 1,000 is still owed: 3 + 1,000 ÷ 3,000 = 3.33 years.
Rising cash flows. I = $50,000 and cash flows of 10,000, 15,000, 20,000 and 25,000. After 3 years 5,000 is still owed: 3 + 5,000 ÷ 25,000 = 3.2 years. At 12% the discounted flows add up to $51,010.04, so the net present value is $1,010.04.
A year with an outflow. I = $1,000 and cash flows of 600, −200 and 700. Still owed: 400 after year 1, 600 after year 2. The payback period is 2 + 600 ÷ 700 = 2.86 years.
Other questions people ask
What is the payback period?
The payback period is the time an investment takes to earn back what it cost, from the cash it brings in. A $16,000 project that brings in $2,000, $4,000 and then $5,000 a year has earned back its cost by the end of year 4.
How do I calculate the payback period?
Add up the yearly cash flows until the total reaches the investment. Count the full years before that, then add the part of the last year you need: the amount still owed divided by that year’s cash flow. $10,000 repaid at $3,000 a year takes 3 + 1,000 ÷ 3,000 = 3.33 years.
What is the discounted payback period?
It is the payback period with each cash flow first discounted to today’s value at a rate such as your cost of capital. Because later dollars are worth less, it is always at least as long as the simple payback period. The OpenStax project takes 5.05 years at 9%.
What are the weaknesses of the payback period?
The simple payback period ignores the time value of money, and both versions ignore every cash flow after the payback point. A project that pays back fast but earns little afterwards can look better than one that pays back slowly and earns much more. Use NPV or IRR as well.
What if a year has a negative cash flow?
Enter it as a negative number. It adds to the amount still owed. The payback period is the first time the running total reaches the investment.
What is a good payback period?
There is no single rule. Many firms set a cut-off, such as 3 or 5 years, and reject projects that take longer. Shorter is safer, because cash in the near future is more certain.