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No. 05Profitability

Payback Period Calculator

Find out how long an investment — new equipment, software, an efficiency upgrade — takes to earn back what it cost, with and without accounting for the time value of money.

Extra cash the investment brings in (or saves) each year.

Your cost of capital or required return. Used for discounted payback.

Results

Simple payback period

3.33 years

  • Cumulative cash
  • Discounted
−$50K$0$50K$100K0246Years
Discounted payback
4.03 years
Show the calculation
  1. Simple payback$50,000.00 ÷ $15,000.00= 3.33 years
  2. Discountedadd $15,000.00 ÷ (1 + 8%)^year until ≥ $50,000.00= 4.03 years

Cash flow that changes year to year

Real investments rarely return the same amount every year. Enter each year’s net cash flow (negative for a year that costs money) to see payback, net present value and internal rate of return. Uses the investment and discount rate above.

Payback
3.33 years
Discounted payback
4.03 years
At 8%
Net present value
$9,890.65
Beats your discount rate
Internal rate of return
15.2%
The yearly return these cash flows imply
  • Cumulative cash
  • Discounted
−$60K−$40K−$20K$0$20K$40K012345Years

How it’s calculated

Simple Payback
equals Initial Investment ÷ Annual Cash Flow
Discounted Cash Flow (year t)
equals Annual Cash Flow ÷ (1 + Discount Rate)^t

Discounted payback adds up each year’s discounted cash flow until the total covers the investment. Because future dollars are worth less today, it is always at least as long as simple payback.

Worked example

A print shop is considering a $36,000 machine that will save about $9,600 a year in outsourcing costs. Its cost of capital is 7%.

  1. Simple payback = $36,000 ÷ $9,600 = 3.75 years
  2. Discounted payback at 7% ≈ 4.51 years

If the machine is expected to last eight years, it pays for itself with time to spare on either measure.

To measure the overall return rather than the time to recover it, use the ROI Calculator.

Assumptions and limitations

  • The main calculator assumes the same cash flow every year; use the year-by-year section for cash flows that change. Cash is assumed to arrive evenly through each year.
  • Payback ignores everything after the payback point, so it can favor quick, small wins over larger long-term ones. Use it alongside ROI.
  • Taxes, maintenance and the asset’s salvage value are not included unless you net them into the annual cash flow.

Results are estimates for information only and are not financial, tax or legal advice. See our disclaimer.