Payback Period Calculator
How long to recover an investment.
Reviewed by the Calculation Machine team · Updated 24 October 2026 · How we check our maths
Your values
ⓘ Live results
- Payback period
- 3.33 years
- In months
- 40
- Discounted payback
- 5 years
- Cash recovered in 5 years
- $90,000.00
Quick answer
The payback period is the time an investment takes to return its upfront cost: initial investment ÷ annual cash inflow, when the inflow is the same each year. A $60,000 machine that saves $18,000 a year pays back in 3.33 years (40 months). The discounted payback counts each year's cash at its present value, so it is always longer — 5 years at an 8% discount rate in this case.
What the Payback Period calculator does
This calculator tells you how long it takes to get your money back from a project, piece of equipment, energy upgrade or business purchase that produces a steady annual cash inflow or saving. It gives the simple payback in years and months, the discounted payback at the rate you choose, and how much cash comes back over five years.
Payback is a risk and liquidity screen, not a measure of profitability. It ignores everything that happens after the break-even point, so a project that pays back fast but stops earning can look better than one that pays back slowly and earns for decades. Use it alongside net present value or an IRR calculation when you are choosing between projects.
The calculator assumes the same cash inflow every year. If inflows vary, add up the yearly amounts until the running total reaches the investment, as shown in the section on uneven cash flows below.
The formula
Simple payback (years) = initial investment ÷ annual cash inflow Discounted payback = first year n where Σ inflow ÷ (1 + r)^t, for t = 1…n, ≥ initial investment
| Symbol | Meaning | Unit |
|---|---|---|
| initial investment | Total upfront cost: purchase price, installation, setup | $ |
| annual cash inflow | Net cash the investment adds each year (extra revenue or savings minus extra running costs) | $ per year |
| r | Discount rate — your cost of capital or required return | % per year |
| t, n | Year number | years |
Both methods are standard capital-budgeting tools covered in corporate finance textbooks. This calculator reports discounted payback as the year in which the discounted total first covers the investment, so it is rounded up to a whole year. Neither method should be used on its own to accept or reject an investment, because both ignore cash flows after payback.
Worked examples
Home solar installation
A homeowner pays $15,000 for solar panels that cut electricity bills by $2,400 a year, and could otherwise earn about 6% on the money.
Inputs
- Initial investment15000 $
- Annual cash inflow2400 $
- Discount rate6 %
Result
- Payback period6.25 years
- In months75
- Discounted payback9 years
- Cash recovered in 5 years$12,000.00
Simple payback is 6.25 years, but once the 6% opportunity cost is counted the money is not fully recovered until year 9. Rising electricity prices would shorten both figures; panel degradation would lengthen them.
Production equipment
A small manufacturer spends $60,000 on a machine that saves $18,000 a year in labor and scrap, with an 8% cost of capital.
Inputs
- Initial investment60000 $
- Annual cash inflow18000 $
- Discount rate8 %
Result
- Payback period3.33 years
- In months40
- Discounted payback5 years
- Cash recovered in 5 years$90,000.00
The machine pays back in 40 months, or by year 5 on a discounted basis. If it is expected to run for 10 years, most of its value comes after payback — which is why NPV is the better test of whether to buy.
Opening a second location
A business invests $250,000 in a new site expected to generate $60,000 of net cash a year, using a 10% required return.
Inputs
- Initial investment250000 $
- Annual cash inflow60000 $
- Discount rate10 %
Result
- Payback period4.17 years
- In months50
- Discounted payback6 years
- Cash recovered in 5 years$300,000.00
Simple payback of 4.17 years stretches to 6 years discounted. If the lease is only five years long, the discounted figure shows the site would not have repaid its cost by the time the lease ends.
Payback with uneven cash flows
Most real projects do not earn the same amount every year. To find payback by hand, keep a running total of cash inflows until it passes the investment, then add the fraction of the final year needed:
payback = years before recovery + (unrecovered amount at start of year ÷ cash flow in that year)
For a $50,000 investment returning $10,000, $20,000 and $30,000 in years 1–3: after year 2 the total is $30,000, leaving $20,000 to recover. Year 3 brings $30,000, so payback is 2 + 20,000 ÷ 30,000 = 2.67 years. For the discounted version, discount each year's flow first and repeat the same process.
| Year | Cash inflow | Cumulative cash |
|---|---|---|
| 0 | −$50,000 | −$50,000 |
| 1 | $10,000 | −$40,000 |
| 2 | $20,000 | −$20,000 |
| 3 | $30,000 | +$10,000 |
Typical payback targets by investment type
There is no universal "good" payback period; it depends on how long the asset lasts and how risky the cash flows are. A sensible rule is that payback should come well inside the asset's useful life. Common rules of thumb used in practice:
- Marketing and customer acquisition: often judged on months, with many subscription businesses targeting recovery of acquisition cost within about 12 months.
- Equipment and software: frequently 2–4 years, shorter for technology that becomes obsolete quickly.
- Energy-efficiency upgrades: LED lighting can pay back in a few years; insulation, heat pumps and solar often take longer and rely on long service lives.
- Real estate and infrastructure: paybacks of 10 years or more can be acceptable because the assets last for decades.
Why payback can mislead
- It ignores cash after payback. Two projects with a 3-year payback look identical even if one earns for 3 more years and the other for 15.
- Simple payback ignores the time value of money. A dollar in year 5 counts the same as a dollar today; the discounted figure corrects this.
- It ignores the size of the investment. A $5,000 project and a $5 million project with the same payback are not equally attractive.
- Annual cash inflow is not profit. Use cash: add back depreciation and exclude financing costs, or the payback will be overstated. A ROI calculation can complement it with total return.
How to use the Payback Period Calculator
- 1Enter the total upfront cost, including installation, delivery and setup.
- 2Enter the net cash the investment brings in or saves each year, after its own running costs.
- 3Enter a discount rate — your borrowing rate or the return you could earn elsewhere. Use 0 to see simple payback only.
- 4Read the payback in years and months, and compare it with the discounted payback and the asset's expected life.
Frequently asked questions
How do you calculate payback period?
Divide the initial investment by the annual cash inflow. $40,000 ÷ $10,000 a year = 4 years. If cash flows vary by year, add them up until the running total equals the investment.
What is the difference between payback period and discounted payback period?
Simple payback adds up cash flows at face value. Discounted payback first converts each year's cash to today's value at a chosen rate, so later cash counts for less and the payback period is longer.
Is a shorter payback period always better?
Shorter payback means less time with money at risk, but it says nothing about total profit. A longer-payback project can be far more valuable if it keeps earning for many years after breaking even.
What discount rate should I use for discounted payback?
Use the return you require on the money: a company's weighted average cost of capital, your loan interest rate, or what the cash would earn in a comparable investment. Higher-risk projects warrant a higher rate.
Can the payback period be longer than the life of the asset?
Yes, and when it is the investment never recovers its cost from the cash flows you entered. That is a clear sign to reject it unless it has benefits the numbers do not capture.
References
- Principles of Corporate Finance (Brealey, Myers and Allen) — McGraw-Hill
- Corporate Finance (Berk and DeMarzo) — Pearson
About this calculator
- Built and reviewed by the Calculation Machine team · How we build and test calculators
- Last reviewed: October 24, 2026
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