# What is the payback period?

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.

- Page: https://www.acalculator.org/finance/payback-period-calculator
- JSON spec: https://www.acalculator.org/finance/payback-period-calculator.json
- Version: 61d7680b0f60

## Default answer

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.

## Inputs

| Key | Label | Description |
| --- | --- | --- |
| investment | Initial investment | What the project costs at the start. |
| flows | Cash flow each year | The net cash the project brings in during year 1, 2, 3 and so on, separated by spaces or new lines. Negative for a year that costs money. |
| rate | Discount rate | The yearly rate for the discounted payback period, such as your cost of capital. |

## Outputs

| Key | Label | Description |
| --- | --- | --- |
| years | Payback period | Years until the cash flows add up to the investment. |
| discounted | Discounted payback period | Years until the discounted cash flows add up to the investment. |
| total | Cash flows minus investment | All the cash flows added up, minus the investment, with no discounting. |
| npv | Net present value | The discounted cash flows added up, minus the investment. |
| note | Note | Says when the discounted cash flows never repay the investment. |

## 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.

## Assumptions

- 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

1. investment = $16,000.00, flows = 2,000 or 4,000, rate = 9% gives years = 4, discounted = 5.048876, total = $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.
2. investment = $10,000.00, flows = 3,000 or 3,000, rate = 0% gives years = 3.333333, discounted = 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.
3. investment = $50,000.00, flows = 10,000 or 15,000, rate = 12% gives years = 3.2, npv = $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.
4. investment = $1,000.00, flows = 600 or -200, rate = 0% gives years = 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.

## FAQ

### 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.

## Sources

- OpenStax, Principles of Finance, 16.4 Alternative Methods: payback period and discounted payback period, with a $16,000 project (cash flows of $2,000, $4,000 and four years of $5,000; payback 4 years; discounted payback at 9% of 5 + 145.72 ÷ 2,981.34 = 5.05 years). https://openstax.org/books/principles-finance/pages/16-4-alternative-methods (retrieved 2026-10-05)