Payback Period Calculator 2026
Calculate Simple & Discounted Investment Payback
Essential capital budgeting tool for investors
What is Payback Period?
⏱️ Payback Period Explained
Payback period is the time required to recover the cost of an investment. It's one of the simplest capital budgeting methods, helping investors determine how long it takes before an investment "pays for itself."
Example: If you invest $100,000 and receive $25,000 per year in cash flows, the payback period is 4 years ($100,000 ÷ $25,000 = 4).
Enter different cash flows for each year:
⏱️ Payback Period Results
📅 Cumulative Cash Flow Timeline
📊 Year-by-Year Breakdown
| Year | Cash Flow | Cumulative | PV Factor | Discounted CF | Cumulative PV |
|---|
Payback Period Formulas
Simple Payback Period (Even Cash Flows)
Simple Payback Period (Uneven Cash Flows)
Discounted Payback Period
Present Value Factor
- Determine Initial Investment: Calculate the total upfront cost of the project or investment.
- Estimate Cash Flows: Project annual cash inflows from the investment (net of costs).
- Calculate Simple Payback: Divide investment by annual cash flow (or sum until recovered).
- Apply Discount Rate: For discounted payback, adjust cash flows to present value.
- Analyze Results: Compare to target payback period and other projects.
Worked Example
📝 Example: Equipment Purchase
Scenario: A company invests $50,000 in new equipment that generates $15,000 annual cash flows. Discount rate is 10%.
| Year | Cash Flow | Cumulative | PV Factor | Discounted CF | Cumulative PV |
|---|---|---|---|---|---|
| 0 | -$50,000 | -$50,000 | 1.000 | -$50,000 | -$50,000 |
| 1 | $15,000 | -$35,000 | 0.909 | $13,636 | -$36,364 |
| 2 | $15,000 | -$20,000 | 0.826 | $12,397 | -$23,967 |
| 3 | $15,000 | -$5,000 | 0.751 | $11,270 | -$12,697 |
| 4 | $15,000 | $10,000 | 0.683 | $10,245 | -$2,452 |
| 5 | $15,000 | $25,000 | 0.621 | $9,314 | $6,862 |
Results: Simple Payback = 3.33 years ($50,000 ÷ $15,000). Discounted Payback ≈ 4.26 years (investment recovered in Year 5 at PV).
Payback Period Benchmarks
| Investment Type | Typical Payback | Max Acceptable | Notes |
|---|---|---|---|
| Solar Panels (Residential) | 6-8 years | 10-12 years | Depends on incentives, rates |
| Equipment Upgrade | 2-4 years | 5-7 years | Manufacturing efficiency |
| Real Estate | 8-15 years | 20 years | Rental income recovery |
| Technology/Software | 1-3 years | 5 years | Fast obsolescence risk |
| Marketing Campaign | 3-12 months | 2 years | Quick ROI expected |
| Startup Venture | 3-7 years | 10 years | High risk/reward |
Simple vs Discounted Payback
| Aspect | Simple Payback | Discounted Payback |
|---|---|---|
| Time Value of Money | Ignores | Considers |
| Complexity | Simple | Moderate |
| Accuracy | Less accurate | More realistic |
| Result | Always shorter | Always longer |
| Best For | Quick screening | Formal analysis |
| Cash Flows After Payback | Ignores | Ignores |
Official Resources
Frequently Asked Questions
Simple Payback = Initial Investment ÷ Annual Cash Flow. Example: $100,000 ÷ $25,000/year = 4 years. For uneven cash flows, sum cash flows until cumulative equals the investment.
It depends on industry and risk. Technology: 1-3 years. Equipment: 3-5 years. Real estate: 8-15 years. Generally, shorter is better, but also consider total profitability beyond payback.
Simple payback ignores the time value of money. Discounted payback adjusts future cash flows to present value using a discount rate. Discounted payback is always longer and more realistic.
It ignores cash flows after payback, doesn't measure total profitability, and simple payback ignores time value. Use alongside NPV and IRR for complete analysis.
Sum cash flows year by year until cumulative equals investment. Payback = Years before full recovery + (Unrecovered cost at start of year ÷ Cash flow during that year).
Common choices: cost of capital (WACC), required return, or opportunity cost. Typical corporate rates: 8-15%. Higher risk projects warrant higher rates.
Not necessarily. A 2-year payback project that ends after 3 years may be worse than a 5-year payback project with 20 years of cash flows. Consider total value, not just payback speed.
For quick screening, liquidity concerns, high-risk projects where fast recovery matters, comparing similar projects, or when future cash flows are uncertain.
Payback measures recovery time. NPV measures total value created. IRR measures return rate. Use all three: payback for risk/liquidity, NPV for value, IRR for return comparison.
If cumulative cash flows never reach the investment amount, the project never pays back—it's unprofitable. This is a clear rejection signal for the investment.
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Last Updated: January 2026