Payback Period Calculator

What payback measures, and what it ignores

Simple payback is the point at which cumulative cash inflows equal the original outlay. With a level cash flow it is just cost divided by annual flow. Its appeal is that everybody understands it, and its weakness is structural: it says nothing about what happens after the money is back, so a project that repays in three years and then stops beats a project that repays in four and runs for twenty. Used alone it systematically favors short projects.

Why the discounted version is longer

Money arriving in year five is worth less than money arriving today, so discounting each flow before adding it up pushes the break-even point further out. The discounted payback is always at least as long as the simple one, and the gap widens with the discount rate. If the discounted flows never add up to the initial cost, the honest answer is that the investment never pays back at that rate — which this page reports as "never" rather than inventing a year, because the difference matters.

Net present value answers the bigger question

NPV sums every discounted cash flow over the whole horizon and subtracts the cost. A positive NPV means the project earns more than your cost of capital; a negative one means the money is better used elsewhere. Payback and NPV can disagree, and when they do NPV is the one to follow — payback is a liquidity and risk screen, not a measure of value created.

Where payback still earns its place

Short payback means capital is tied up briefly, which matters when cash is tight or when the forecast beyond a few years is guesswork. In fast-moving industries, a five-year projection is often fiction, so a rule requiring payback inside two years is a crude but defensible way of refusing to bet on numbers nobody can stand behind. The method is a risk filter first and a profitability measure a distant second.

Getting the cash flows right

The inputs should be incremental after-tax cash flows: money that exists because the project happened, after tax, excluding financing costs, which the discount rate already represents. Depreciation is not a cash flow and does not belong in the list, although the tax it saves does. Sunk costs already spent belong nowhere — they are gone whichever way the decision goes.

Frequently Asked Questions