Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Payback asks how long it takes to get your money back, and it is a liquidity measure, not a profit measure. A $100,000 investment returning $28,000 a year is repaid in about 3.6 years, or 5.0 years once the cash is discounted at 8 percent, because later dollars are worth less. The first-year cash return, 28 percent, is the same figure turned into a rate. Neither says anything about what happens after the money is back.
Before you rely on it
What to check
Use payback next to net present value and the length of the cash flow. A project with a fast payback and a short life can be worse than a slower one that keeps paying.
The common error
Where people go wrong with investment payback period calculator
Ranking projects by payback alone. It ignores every cash flow after the payback date, so a project that pays well for decades can lose to a quick, small one.
Sensitivity evidence
How initial investment changes the simple payback period
| Initial investment | Simple payback period | Discounted payback period | First-year cash return |
|---|---|---|---|
| $80,000 | 2.9 years | 4.0 years | 35.0% |
| $90,000 | 3.2 years | 4.0 years | 31.1% |
| $100,000worked example | 3.6 years | 5.0 years | 28.0% |
| $110,000 | 3.9 years | 5.0 years | 25.5% |
| $120,000 | 4.3 years | 6.0 years | 23.3% |
Every input, tested
Which input moves the simple payback period most
| Input | Tested from | To | Simple payback period at each end | Swing |
|---|---|---|---|---|
| Annual cash inflow | $25,200 | $30,800 | 4.0 years to 3.2 years | 0.7 years (20%) |
| Initial investment | $90,000 | $110,000 | 3.2 years to 3.9 years | 0.7 years (20%) |
| Discount rate | 6.0% | 10.0% | 3.6 years to 3.6 years | none |
Two variables at once
Simple payback period by initial investment and annual cash inflow
| Initial investment \ Annual cash inflow | $22,400 | $28,000 | $33,600 |
|---|---|---|---|
| $80,000 | 3.6 years | 2.9 years | 2.4 years |
| $90,000 | 4.0 years | 3.2 years | 2.7 years |
| $100,000 | 4.5 years | 3.6 years | 3.0 years |
| $110,000 | 4.9 years | 3.9 years | 3.3 years |
| $120,000 | 5.4 years | 4.3 years | 3.6 years |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Initial investment | $100,000 |
| Annual cash inflow | $28,000 |
| Discount rate | 8.0% |
| Simple payback period | 3.6 years |
| Discounted payback period | 5.0 years |
| First-year cash return | 28.0% |
Where the inputs come from
Initial investment is the total cost, annual cash inflow is the money the investment returns each year after operating costs, and the discount rate is your required return for the discounted version. Use realistic, after-tax cash figures. It suits rental property, equipment, a small business purchase or a solar installation, where a steady yearly return is plausible. Include any installation or closing costs in the initial amount.
When the result stops applying
Payback ignores everything that happens after the money is recovered, so it favors quick, small returns over larger, longer ones. Equal annual inflows are assumed, which fits few real projects. It also does not say whether the investment is worth doing, only how fast it recovers cost. Uncertain cash flows make the figure unreliable.
What to compare it with
Confirm the decision with the net present value calculator, which counts all cash flows, and with the IRR calculator for the rate of return. The first-year cash return line is the simple yield you would compare with a bond or a savings rate. For a property, add the cap rate calculator to see the yield on price.
People also ask
Frequently asked questions
What is a good payback period?
It depends on the asset. Businesses often want equipment to pay back within three to five years, while a rental property may take much longer but keeps producing income.
Why is discounted payback longer?
It discounts each year's cash to today's value, so early payments recover cost more slowly than the undiscounted sum suggests.
Does payback measure profitability?
No. It shows only how long recovery takes and ignores cash after that point, so an investment with a long payback can still be the better one.