Payback Period Calculator
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- Formula shown
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Results
Payback in 3.67 years (4.61 years discounted), NPV $8,197 at 8%, IRR 13.33%.
| Year | Cash flow | Cumulative | Discounted at 8% | Cumulative discounted |
|---|---|---|---|---|
| 0 | −$50,000 | −$50,000 | −$50,000 | −$50,000 |
| 1 | $10,000 | −$40,000 | $9,259 | −$40,741 |
| 2 | $14,000 | −$26,000 | $12,003 | −$28,738 |
| 3 | $16,000 | −$10,000 | $12,701 | −$16,037 |
| 4 | $15,000 | $5,000 | $11,025 | −$5,011 |
| 5 | $12,000 | $17,000 | $8,167 | $3,156 |
| 6 | $8,000 | $25,000 | $5,041 | $8,197 |
Cash flows are assumed to arrive at the end of each year and evenly within a year when the payback point is interpolated. Taxes, inflation and resale value are not included unless you build them into the cash flows.
How to use the payback period calculator
- Enter the upfront cost of the investment: equipment, installation, software or a whole project.
- Choose even cash flows (the same saving or profit every year) or list a different net cash flow for each year.
- Enter a discount rate: your cost of borrowing or the return you require. It drives the discounted payback, NPV and profitability index.
- Read the results, then check the year-by-year table to see when the cumulative figure turns positive.
Payback, NPV and IRR formulas
Payback (uneven flows) = years before recovery + amount still unrecovered ÷ cash flow in the recovery year
Discounted cash flow in year t = CFt ÷ (1 + r)t
NPV = −investment + Σ CFt ÷ (1 + r)t · IRR = the r at which NPV = 0
The simple payback period counts nominal cash flows until they add up to the investment. The discounted payback does the same with each year's cash flow converted to today's money at the discount rate, so it is always longer. NPV adds up all discounted cash flows, including those after payback; a positive NPV means the project earns more than the discount rate. IRR is the discount rate that makes NPV exactly zero.
Worked example
A $50,000 machine is expected to bring in $10,000, $14,000, $16,000, $15,000, $12,000, $8,000 over six years. After three years the cumulative cash flow is −$10,000, and year 4 brings $15,000, so payback is 3 + $10,000 ÷ $15,000 = 3.67 years (3 years 8 months). At an 8% discount rate the discounted payback is 4.61 years, the NPV is $8,197 and the IRR is 13.33%.
Payback alone can mislead. Project A costs $100,000 and returns $50,000, $50,000 and $10,000: it pays back in 2 years but has an NPV of −$5,710 at 10% (IRR 6.04%). Project B returns $20,000 rising to $60,000 over five years: payback takes 3.2 years, but its NPV is $44,434 (IRR 23.29%).
Payback for even cash flows
A $100,000 investment with the same cash flow for 10 years, discounted at 8%.
| Yearly cash flow | Payback | Discounted payback | NPV (10 years) | IRR |
|---|---|---|---|---|
| $10,000 | 10 years | Not reached | −$32,899 | -0% |
| $15,000 | 6.67 years | 9.91 years | $651 | 8.14% |
| $20,000 | 5 years | 6.65 years | $34,202 | 15.1% |
| $25,000 | 4 years | 5.01 years | $67,752 | 21.41% |
| $33,330 | 3 years | 3.58 years | $123,647 | 31.11% |
| $50,000 | 2 years | 2.27 years | $235,504 | 49.08% |
Using the results well
- Use payback as a risk screen, not a final answer. A short payback limits how long your money is exposed, but it ignores everything after the break-even year.
- Decide with NPV. Between projects, the one with the higher positive NPV adds the most value at your discount rate. IRR can rank projects of different sizes or lengths differently.
- Use net cash flows. Count savings or extra profit after running costs and taxes, not revenue. Include a resale value in the last year if there is one.
- Pick a realistic rate. Your loan rate is a floor; riskier projects deserve a higher rate.
- Depreciation is not a cash flow, but it lowers taxes. The depreciation calculator gives the yearly amounts.
Financing the purchase? The business loan calculator shows the repayments, and the present value calculator discounts a single future amount.
Frequently asked questions
How do I calculate the payback period?
With even cash flows, divide the investment by the yearly cash flow: $10,000 returning $2,500 a year pays back in 4 years. With uneven flows, add the cash flows until they cover the investment and interpolate within the last year.
What is the payback period of a $50,000 investment returning $10,000, $14,000, $16,000 and $15,000?
After three years $40,000 has come back, leaving $10,000. Year 4 brings $15,000, so payback is 3 + 10,000 ÷ 15,000 = 3.67 years, about 3 years 8 months.
What is a discounted payback period?
The time until the present value of the cash flows covers the investment. Each year’s cash flow is divided by (1 + r) to the power of the year. For $10,000 returning $2,500 a year, simple payback is 4 years but discounted payback at 10% is about 5.37 years.
What is the difference between payback and NPV?
Payback only measures how fast money comes back and ignores later cash flows and the time value of money. NPV discounts every cash flow. A $100,000 project returning $50,000, $50,000 and $10,000 pays back in 2 years but has an NPV of about −$5,710 at 10%.
What does IRR mean?
The internal rate of return is the discount rate at which NPV is zero, the project’s own yearly return. $10,000 returning $2,500 a year for six years has an IRR of about 12.98%, so it is worth doing if your required return is lower.