What this calculator does
Payback period asks the simplest possible question about an investment: how long until the money comes back. It is not a complete measure of value, but it is the one figure almost everyone understands immediately.
The discounted version is the more honest one. Cash arriving in year four is worth less than cash arriving today, and accounting for that stretches a 3.33 year simple payback out to 4.10 years at an 8 per cent discount rate.
The formula
Cash flows are accumulated year by year until the running total reaches the initial investment, interpolating within the crossing year. The discounted version divides each cash flow by one plus the rate, raised to its year, before accumulating.
| Term | Meaning |
|---|---|
| Simple payback | Years to recover the investment, treating all cash as equally valuable. |
| Discounted payback | The same, but with each year's cash discounted back to present value. |
| Crossing year | The year in which the cumulative total passes the investment, interpolated to a fraction. |
The inputs explained
| Field | What to enter |
|---|---|
| Initial investment ($) | The upfront investment to be recovered. |
| Cash flow each year (comma separated) | Cash flow for each year, comma separated, in order. |
| Discount rate (%) | The discount rate used for the discounted payback figure. |
When to use it
Screening a capital project
A quick payback filter rules projects in or out before the fuller analysis is worth doing.
Comparing two equipment options
Where both deliver similar savings, the one that recovers its cost sooner carries less risk.
Assessing risk exposure
A long payback means capital is at risk for longer, which matters where the future is uncertain.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much does the discount rate stretch the payback?
The same project assessed at three discount rates.
| Discount rate | Simple payback period | Discounted payback period |
|---|---|---|
| 6% | 3.33 years | 3.86 years |
| 8% | 3.33 years | 4.10 years |
| 12% | 3.33 years | 4.86 years |
Questions
What is wrong with payback period?
It ignores everything that happens after the payback point. A project that returns its cost in three years then stops looks identical to one that returns it in three years then continues for a decade, which is a serious blind spot.
Why use it at all, then?
Because it is immediately understandable and it captures risk exposure in a way that net present value does not make obvious. It works well as a first screen alongside a proper valuation, not instead of one.
What payback period is acceptable?
That depends entirely on the industry and the type of investment. Manufacturing equipment might justify five years; a software tool might need to pay back in one. There is no universal threshold.
Why does the answer include a fraction of a year?
Because the cumulative total usually crosses the investment partway through a year. The figure interpolates within that year rather than rounding up to the next whole one.
For the fuller valuation measure, see the NPV and IRR calculator. For a simple return measure, see the return on investment calculator.