Payback Period Calculator
Calculate how long an investment takes to recover its cost, with both simple and discounted payback, and where the metric misleads.
Last reviewed by the Radiatus Cloud team
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What payback period measures
How long until cumulative cash inflows equal the initial outlay. An investment of 50,000 returning 15,000 a year pays back in three years and four months. It is popular because it is immediately understandable and answers the question people actually ask about a proposal, which is how long before this stops being a hole in the budget.
Two serious blind spots
It ignores everything after payback. A project paying back in three years then producing nothing scores identically to one paying back in three years and producing for twenty more. Ranking proposals by payback alone systematically favours short-lived projects over valuable ones.
It also ignores the time value of money in its simple form. Cash received in year four is treated as equal to cash received in year one, which it is not.
Discounted payback
Discounting each year's cash flow before accumulating fixes the second problem and produces a longer, more honest period. It does not fix the first. Discounted payback is the better of the two and still should not be the deciding metric on its own.
Use it as a risk filter, not a ranking
Payback is genuinely good at one thing: expressing exposure. A short payback means capital is at risk for less time, which matters when the future is uncertain, technology moves quickly, or the business needs liquidity. Used as a threshold, rejecting anything beyond a certain period, it is sensible. Used to choose between proposals that both clear the threshold, it is misleading. Rank on net present value or internal rate of return and use payback as a constraint alongside them.
Uneven cash flows
Where inflows vary year to year, accumulate them until the total crosses the outlay and interpolate within the final year. Beware projects with negative cash flows partway through, such as a mid-life overhaul, since the cumulative total can cross zero more than once and the simple reading of payback becomes ambiguous.
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Frequently Asked Questions
What is a good payback period?
It depends entirely on context and risk. Manufacturing equipment might justify five to seven years, while a fast-moving software investment may need under two. What matters is consistency of threshold across comparable proposals.
What is the difference between simple and discounted payback?
Simple payback adds undiscounted cash flows, treating year-four money as equal to year-one money. Discounted payback discounts each year first, producing a longer and more honest figure.
Why should I not rank projects by payback?
Because it ignores everything after the payback point. A project paying back in three years then stopping scores the same as one paying back in three years and running for twenty more. Rank on NPV or IRR instead.
How do I handle uneven cash flows?
Accumulate year by year until the total crosses the initial outlay, then interpolate within that year. Be careful with projects that go cash-negative partway through, since the total can cross zero more than once.
When is payback the right metric?
As a risk filter expressing how long capital is exposed. Used as a threshold it is sensible; used to choose between proposals that both clear the threshold it misleads.
Privacy & Security
Runs entirely in your browser. Investment numbers stay on your device.
How to Use
Enter the upfront investment, expected annual benefit, annual running cost, optional residual value and analysis period to estimate the simple payback period and approximate ROI.
Disclaimer: This tool is provided "as is" without warranty of any kind. Results are for educational and utility purposes.
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