How to use the payback period calculator
Use Fixed cash flow when the investment brings in about the same amount every year, or an amount that grows or shrinks by a steady percent: enter the cost, the first year's cash flow, the yearly change, the number of years and a discount rate. Use Irregular cash flow when every year is different: enter the cost, the discount rate and the cash flow of each year, with a negative amount for a year that needs more money.
The calculator shows the payback period, the discounted payback period, the cash flow return rate (the IRR) and a year-by-year table that you can export as CSV or PDF. The results update as you type.
Payback period formula
When the cash flow is the same every year, the payback period is simply:
Payback period = initial investment ÷ yearly cash flow
A machine that costs $100,000 and saves $25,000 a year pays back in $100,000 ÷ $25,000 = 4 years. When the cash flows differ from year to year, add them up until they cover the cost and count the last year in part:
Payback period = years before full recovery + amount still missing ÷ cash flow of the next year
Payback period example with uneven cash flows
A $100,000 project brings in $5,000, $25,000, $35,000, $40,000, $30,000, $10,000 in its first 6 years. These are the default inputs of the Irregular cash flow tab.
| Year | Cash flow | Cumulative | Discounted at 10% | Cumulative discounted |
|---|---|---|---|---|
| 0 | −$100,000 | −$100,000 | −$100,000 | −$100,000 |
| 1 | $5,000 | −$95,000 | $4,545 | −$95,455 |
| 2 | $25,000 | −$70,000 | $20,661 | −$74,793 |
| 3 | $35,000 | −$35,000 | $26,296 | −$48,497 |
| 4 | $40,000 | $5,000 | $27,321 | −$21,177 |
| 5 | $30,000 | $35,000 | $18,628 | −$2,549 |
| 6 | $10,000 | $45,000 | $5,645 | $3,096 |
After 3 years $65,000 is back and $35,000 is still missing. Year 4 brings $40,000, so the payback period is 3 + $35,000 ÷ $40,000 = 3.875 years. With the cash flows discounted at 10%, it takes 5.452 years, and the cash flow return rate over the 6 years is 10.96% a year.
Payback period example with a growing cash flow
A $100,000 investment brings in $30,000 in its first year, and the cash flow grows 5% a year. These are the default inputs of the Fixed cash flow tab. The payback period is 3.156 years, and the discounted payback period at 10% is 3.921 years.
Discounted payback period
Money received in five years is worth less than money today, because today's money could earn a return in the meantime. The discounted payback period first turns each year's cash flow into today's value:
Discounted cash flow = cash flow ÷ (1 + discount rate)year
It then adds up the discounted amounts in the same way. The discounted payback is always longer than the simple one, and if it is longer than the life of the investment, the investment does not earn back the return you could get elsewhere. The present value calculator shows the same discounting for a single amount.
What is a good payback period?
It depends on how long the investment lasts and how risky it is. Many businesses want equipment and projects to pay back within 2 to 5 years, because cash flows further out are harder to predict. For home upgrades the bar is lower: solar panels often pay back in 6 to 10 years. The rule that always applies is that the payback period must be well within the useful life of what you buy.
For example, a $15,000 solar system that cuts electricity bills by $1,800 a year pays back in $15,000 ÷ $1,800 = 8.333 years. With panels that last 25 years or more, the savings after that are a gain.
Advantages and limits of the payback period
- Simple and easy to explain: it answers how long your money is at risk.
- Useful when cash is tight: a short payback frees money for the next project sooner.
- Ignores everything after the payback: a project that pays back quickly but earns little afterwards can look better than one that earns much more in the long run.
- Ignores the time value of money: the simple payback treats a dollar in year 5 like a dollar today; the discounted payback fixes that.
Payback period vs IRR, NPV and ROI
- IRR is the yearly return of all the cash flows, including the ones after the payback. The IRR calculator also handles a fixed regular cash flow and an ending balance.
- NPV is the value today of all the cash flows at your discount rate. A positive NPV means the investment earns more than that rate.
- ROI is the total gain as a percent of the cost. The ROI calculator also gives the annualized ROI.
Use the payback period to see how fast the money comes back, and the IRR or NPV to see how much the investment earns in total.
How to calculate the payback period in Excel
Excel has no payback function. Put the years in column A, the cash flows in column B with the investment as a negative number in year 0, and a running total in column C: =C1+B2 copied down. Find the last year with a negative total, then add the missing amount divided by the next year's cash flow, as in the example above. For the discounted payback, add a column with =B2/(1+rate)^A2 and keep a running total of it instead.