How it works
The payback period is how long it takes for an investment's cash inflows to add up to its initial cost. It is a quick way to gauge risk and liquidity: the shorter the payback, the sooner your money is back.
With uneven cash flows, the calculator finds the year in which cumulative cash turns positive and interpolates within that year, assuming cash arrives evenly through the year.
Discounted payback does the same using each year's present value, so it accounts for the time value of money and is longer than simple payback whenever the discount rate is above zero.
Formula
Even flows: Payback = Investment ÷ Annual cash inflow. Uneven flows: Payback = Years before recovery + Unrecovered amount ÷ Cash flow in the recovery year.
Questions people ask
What is a good payback period?
It depends on the asset and your risk tolerance. Many small businesses look for 2–3 years on equipment and marketing investments; energy projects like solar commonly pay back in 6–10 years.
What are the weaknesses of payback period?
It ignores everything after the payback point, so a project that keeps earning for 20 years looks the same as one that stops right after paying back. Simple payback also ignores the time value of money. Use NPV or IRR alongside it.
How is discounted payback calculated?
Each year's cash inflow is divided by (1 + r)^year before accumulating. The payback point is when the cumulative discounted amount reaches the initial investment.