How to use this calculator
- Enter the Initial investment: the up-front cost.
- Add the Cash flow per year you expect and any Cash flow growth per year (use a negative number for a decline).
- Set the Discount rate, your required return, for the discounted version.
- Read the Payback period and Discounted payback, and use the table to see the cumulative position each year.
Simple and discounted payback
The payback period is the time until the cumulative cash flows equal what you put in. If the break-even falls part-way through a year, the calculator interpolates, so a result of 4.17 means four years and about two months.
simple: smallest t where Σ CFₖ ≥ I discounted: smallest t where Σ CFₖ/(1 + r)ᵏ ≥ I- I = initial investment
- CFₖ = cash flow in year k (grows by the growth rate each year)
- r = discount rate
- t = years, with a fraction for the part-year
The discounted payback divides each year's cash flow by (1 + discount rate) raised to the year number before adding them up. Money received later is worth less today, so the discounted payback is always at least as long as the simple one.
Example: a $25,000 purchase earning $6,000 a year
With flat cash flows and an 8% discount rate, the simple payback is 4.17 years and the discounted payback is 5.28 years. In the table, the cumulative discounted position is still -$1,044 at the end of year 5 and turns positive in year 6.
If cash flow grows 5% a year the simple payback shortens to 3.88 years and the discounted payback to 4.74 years. With a 0% discount rate the two figures are equal at 4.17.
How to read it
A shorter payback means your money is at risk for less time, which matters when the future is uncertain or cash is tight. Compare it with how long the benefit will really last: a machine with a 4-year payback and a 3-year life is a loss.
Payback tells you about recovery, not profit. It ignores everything after the break-even point. Pair it with the NPV calculator and the IRR calculator to see whether the project creates value overall.
Where it is used
- Solar panels, insulation or an efficient appliance: cost against yearly savings.
- Equipment or software for a business: use the break-even calculator for the sales side.
- Rental property: compare with rental yield.
- Courses or tools that raise your income.
Common mistakes
Using revenue instead of net cash flow, so running costs and taxes are missed. Assuming savings continue forever when equipment wears out. Ignoring a lump-sum replacement cost later. Treating a quick payback as proof that a project is good, when a slower one may return far more in total.
Assumptions and limits
Cash flows arrive evenly each year, start in year 1 and follow a constant growth rate. The search covers up to 50 years; if the investment is never recovered, the result is blank. Taxes, inflation, financing and any residual value are not included. Treat the result as a screening tool.
Frequently asked questions
What is a good payback period?
It depends on the investment's lifespan and your risk. Shorter is safer, but it should also be well inside the period the benefit will last.
Why is discounted payback longer?
Future cash flows are worth less in today's money, so it takes longer for their discounted total to cover the cost.
Why do I get no payback period?
The cash flows never add up to the investment within 50 years, for example because they are too small or are shrinking.
Can I use monthly cash flows?
Convert them to a yearly total first, since the calculator works in annual steps.