How to use this calculator
- Enter or choose initial investment.
- Enter or choose cash inflow for each period.
- Enter or choose discount rate (per period).
- The payback period updates as you type. Use Copy result or Share to keep it.
Method
Payback = k + (amount still unrecovered at the start of period k+1) ÷ (cash flow in period k+1), where k is the last whole period before recovery; discounted flows CFₜ ÷ (1 + r)ᵗ
- CFₜ
- cash flow in period t
- r
- discount rate per period
- NPV
- Σ CFₜ ÷ (1 + r)ᵗ − initial investment
Worked example
- After 2 periods 3,000 + 3,500 = 6,500 is recovered; 3,500 remains and period 3 brings 4,000, so payback = 2 + 3,500 ÷ 4,000 = 2.88.
- Discounted at 8%: 2,777.78 + 3,000.69 + 3,175.33 = 8,953.79 after 3 periods; period 4 adds 2,940.12, so 3 + 1,046.21 ÷ 2,940.12 = 3.36.
- NPV = sum of all five discounted flows (14,616.24) − 10,000 = 4,616.24.
The investment pays back in 2.88 periods, or 3.36 periods once the 8% cost of money is taken into account.
What the result means
Payback measures risk and liquidity, not profitability: it ignores everything after the break-even point. Use it alongside NPV or IRR, and prefer the discounted version when periods are long or rates are high.
Assumptions and limits
- Cash flows arrive evenly through each period, so the fractional part is interpolated.
- The discount rate is per period and constant.
- Cash flows after payback are ignored by the payback figure itself.
Questions
What is a good payback period?
It depends on the business and the risk. Many firms set a maximum, such as three years for equipment, but a short payback alone does not make a project worthwhile.
Why is discounted payback longer?
Each future cash flow is worth less in today’s money, so it takes more of them to cover the cost.
Please note: Returns are illustrations at a constant rate, not predictions or guarantees. Investments can lose value. This is not investment advice.