Payback Period Calculator

The Payback Period Calculator can calculate payback periods, discounted payback periods, average returns, and schedules of investments.

Fixed Cash Flow

Initial Investment
Cash Flow		/Year
Increase Decrease		/Year
Number of Years
Discount Rate

Irregular Cash Flow Each Year

Initial Investment   Discount Rate     Cash Flow Year 1. Year 2. Year 3. Year 4. Year 5. Year 6. Year 7. Year 8. Show More Input Fields Year 9. Year 10. Year 11. Year 12. Year 13. Year 14. Year 15. Year 16. Year 17. Year 18. Year 19. Year 20. Year 21. Year 22. Year 23. Year 24. Year 25. Year 26. Year 27. Year 28. Year 29. Year 30. Year 31. Year 32. Year 33. Year 34. Year 35. Year 36. Year 37. Year 38. Year 39. Year 40. Year 41. Year 42. Year 43. Year 44. Year 45. Year 46. Year 47. Year 48. Year 49. Year 50. Year 51. Year 52. Year 53. Year 54. Year 55. Year 56. Year 57. Year 58. Year 59. Year 60. Year 61. Year 62. Year 63. Year 64. Year 65. Year 66. Year 67. Year 68. Year 69. Year 70. Year 71. Year 72. Year 73. Year 74. Year 75. Year 76. Year 77. Year 78. Year 79. Year 80. Year 81. Year 82. Year 83. Year 84. Year 85. Year 86. Year 87. Year 88. Year 89. Year 90. Year 91. Year 92. Year 93. Year 94. Year 95. Year 96. Year 97. Year 98. Year 99. Year 100.

Related

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Cash Flow

Cash flow is the inflow and outflow of cash or cash-equivalents of a project, an individual, an organization, or other entities. Positive cash flow that occurs during a period, such as revenue or accounts receivable means an increase in liquid assets. On the other hand, negative cash flow such as the payment for expenses, rent, and taxes indicate a decrease in liquid assets. Oftentimes, cash flow is conveyed as a net of the sum total of both positive and negative cash flows during a period, as is done for the calculator. The study of cash flow provides a general indication of solvency; generally, having adequate cash reserves is a positive sign of financial health for an individual or organization.

Discounted Cash Flow

Discounted cash flow (DCF) is a valuation method commonly used to estimate investment opportunities using the concept of the time value of money, which is a theory that states that money today is worth more than money tomorrow. Forecasted future cash flows are discounted backward in time to determine a present value estimate, which is evaluated to conclude whether an investment is worthwhile. In DCF analysis, the weighted average cost of capital (WACC) is the discount rate used to compute the present value of future cash flows. WACC is the calculation of a firm's cost of capital, where each category of capital, such as equity or bonds, is proportionately weighted. For more detailed cash flow analysis, WACC is usually used in place of discount rate because it is a more accurate measurement of the financial opportunity cost of investments. WACC can be used in place of discount rate for either of the calculations.

Discount Rate

Discount rate is sometimes described as an inverse interest rate. It is a rate that is applied to future payments in order to compute the present value or subsequent value of said future payments. For example, an investor may determine the net present value (NPV) of investing in something by discounting the cash flows they expect to receive in the future using an appropriate discount rate. It's similar to determining how much money the investor currently needs to invest at this same rate in order to get the same cash flows at the same time in the future. Discount rate is useful because it can take future expected payments from different periods and discount everything to a single point in time for comparison purposes.

Payback Period

Payback period, which is used most often in capital budgeting, is the period of time required to reach the break-even point (the point at which positive cash flows and negative cash flows equal each other, resulting in zero) of an investment based on cash flow. For instance, a $2,000 investment at the start of the first year that returns $1,500 after the first year and $500 at the end of the second year has a two-year payback period. As a rule of thumb, the shorter the payback period, the better for an investment. Any investments with longer payback periods are generally not as enticing.

Due to its ease of use, payback period is a common method used to express return on investments, though it is important to note it does not account for the time value of money. As a result, payback period is best used in conjunction with other metrics.

The formula to calculate payback period is:

Payback Period =

Initial investment Cash flow per year

As an example, to calculate the payback period of a $100 investment with an annual payback of $20:

$100 $20

= 5 years

Discounted Payback Period

A limitation of payback period is that it does not consider the time value of money. The discounted payback period (DPP), which is the period of time required to reach the break-even point based on a net present value (NPV) of the cash flow, accounts for this limitation. Unlike payback period, DPP reflects the amount of time necessary to break-even in a project based not only on what cash flows occur, but when they occur and the prevailing rate of return in the market, or the period in which the cumulative net present value of a project equals zero all while accounting for the time value of money. Discounted payback period is useful in that it helps determine the profitability of investments in a very specific way: if the discounted payback period is less than its useful life (estimated lifespan) or any predetermined time, the investment is viable. Conversely, if it's greater, the investment generally should not be considered. Comparing the DPP of different investments, ones with the relatively shorter DPPs are generally more enticing because they take less time to break-even.

The formula for discounted payback period is:

Discounted Payback Period =

- ln(1 -  investment amount × discount rate cash flow per year ) ln(1 + discount rate)

The following is an example of determining discounted payback period using the same example as used for determining payback period. If a $100 investment has an annual payback of $20 and the discount rate is 10%., the NPV of the first $20 payback is:

$20 1.10

= $18.18

The NPV of the second payback is:

$20 1.102

= $16.53

The next in the series will have a denominator of 1.10³, and continuously as needed. For this particular example, the break-even point is:

DPP =

- ln(1 -  $100 × 0.10 $20 ) ln(1 + 0.10)

= 7.27 years

The discounted payback period of 7.27 years is longer than the 5 years as calculated by the regular payback period because the time value of money is factored in.

Discounted payback period will usually be greater than regular payback period. Investments with higher cash flows toward the end of their lives will have greater discounting. Both payback period and discounted payback period analysis can be helpful when evaluating financial investments, but keep in mind they do not account for risk nor opportunity costs such as alternative investments or systemic market volatility. It can help to use other metrics in financial decision making such as DCF analysis, or the internal rate of return (IRR), which is the discount rate that makes the NPV of all cash flows of an investment equal to zero.

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