Payback period calculator
How long an investment takes to pay for itself.
Fill in the fields and the result will appear here automatically.
Payback asks when the supplied cash receipts cover an initial investment. Simple payback uses a constant annual flow; discounted payback reduces future flows at the annual rate you enter. Receipts begin in year one and the model has no project-life field. A calculated payback duration must therefore be compared with how long the real cash flows are expected to continue.
How it works
Formula and logic
Simple duration = I / C. With decimal annual rate r, present value through year n is C/r × (1 − (1+r)^−n). If C/r ≤ I, no finite discounted payback exists at a positive rate. Otherwise logarithms locate the final year and a linear share of that year’s discounted flow is used. Annual values are discounted to each year-end; the displayed fraction is not an actual payment date. There is no fixed 1,000-year cutoff. Numerical precision/range limits are reported separately; durations below 100 years normally use up to three decimals, those from 100 years use up to two, and smaller values retain more digits.
Example
Investment 1,000,000, annual flow 300,000 and 0% give 3.333 years or 40 months. Investment 5,000,000, flow 1,200,000 and 10% give simple payback 4.167 and discounted payback 5.666 years. At investment 100,000, flow 10,000 and 10%, finite discounted payback does not exist. Near the recovery boundary, investment 100,000, flow 100.001 and 0.1% give finite discounted payback of about 11,518.69 years.
Fields and units
- Investment — monetary units
- Annual cash flow — monetary units/year
- Discount rate, % — unitless
How to use
- — Enter a positive initial investment and positive annual net cash flow in the same currency.
- — Use cash receipts less cash expenses. Accounting depreciation is not itself a cash payment.
- — A zero discount rate gives the simple duration. A positive rate must be annual and consistent with the cash-flow basis.
- — Read the fractional-year convention: the final discounted annual flow is interpolated linearly, rather than assigned an actual receipt date.
- — Compare with project life. Unequal, delayed or negative flows require a separate cash-flow schedule.
Method and limitations
- Calculation method
- Formula and logic
- Data or methodology source
- ACCA: cash flows, discounted payback and the timing of receipts
- Limitation
- One initial investment and a constant positive annual flow. Project life, varying flows, payment dates and automatic tax or inflation adjustments are absent. Extremely long durations describe mathematical assumptions rather than a forecast of project survival.
FAQ
Why should the flow be cash rather than accounting profit?
Payback counts receipts and payments. Depreciation changes accounting profit but is not a cash outflow in itself. Taxes and investment payments need a consistent cash-flow schedule, which this simplified form does not construct.
What does the fraction of the final discounted year mean?
It spreads that year’s discounted annual flow linearly. If the money actually arrives as one payment at year-end, recovery occurs at the end of that whole year. The form has no receipt dates.
Why does a perpetual value exactly equal to investment not pay back?
At a positive rate each finite series is below its infinite-series limit. It approaches the investment but never reaches it in a finite year. Reaching a numerical calculation limit is a different condition.
How is the discount rate chosen here?
You supply it. Keep the annual rate consistent with nominal or real cash flows and the cost-of-capital basis you chose. The calculator does not automatically equate a rate to inflation plus a risk premium.
Can payback alone rank the better investment?
It omits the contribution of flows after recovery and does not replace NPV or a return measure. Projects with equal payback can have different lives, risks and total cash outcomes.