How to use the payback and discounted payback calculator
- Enter the starting cost as a positive number and a discount rate per period. The rate is an example you can change.
- Choose whether each period is a year, quarter or month, then list the cash you expect in each period, in order, separated by commas, spaces or new lines.
- Read the payback period, which ignores discounting, and the discounted payback period, which divides each period's cash by (1 + rate) to the power of the period.
- Check the running totals in the table to see in which period each measure turns positive.
Formula
running total after period t = -cost + cash 1 + ... + cash t
payback = (t - 1) + unrecovered / cash of period t
discounted cash of period t = cash t / (1 + r)^t
t is the first period in which the running total reaches zero or more. The fraction assumes cash arrives evenly through that period. Discounted payback repeats the same steps with the discounted cash.
A $50,000 project with growing cash
The project costs $50,000 and returns $5,000, $10,000, $15,000, $20,000, $25,000 and $25,000 over six years. The money still to be recovered is $45,000.00, $35,000.00, $20,000.00, and then nothing at the end of year 4, so the payback period is exactly 4 years.
At a discount rate of 8%, the same cash is worth $4,629.63, $8,573.39, $11,907.48, $14,700.60, $17,014.58 and $15,754.24. The discounted amount still to be recovered is $10,188.90 after year 4 and zero after year 5. The discounted payback is 4 + 10,188.90 / 17,014.58 = 4.6 years. The net present value after six years is $22,579.92.
What payback tells you and what it does not
Payback answers one question: how long until the money is back. It is easy to explain and it favors projects that return cash early, which matters when cash is tight or the future is uncertain. It says nothing about what happens afterward, so two projects with the same payback can have very different total returns.
Discounted payback is stricter because it counts the time value of money. It is always at least as long as the plain payback for a positive rate. If the cash never covers the cost even after all listed periods, the page says so instead of guessing.
Use it with the other measures
Read payback next to the net present value and the internal rate of return, which look at the whole life of the project. The IRR and NPV Calculator finds both from the same cash flows. For a sales cost, the CAC Payback Period Calculator works from margin per customer, and the ROI Calculator gives a simple gain on cost.
Assumptions and limits
- Cash flows arrive evenly within a period, and the discount rate is the same in every period.
- Both measures stop at the first time the running total reaches zero. Negative cash in later periods is not looked at.
- The starting cost is paid at the beginning, before period 1. Taxes, inflation and financing are not modeled.
- The discount rate is an example. Use a rate that suits your own situation and the same period as your cash flows.
Frequently asked questions
What is a good payback period?
There is no universal answer. It depends on the industry, the risk and how soon you need the money back. Use the number to compare options that you are choosing between, not as a pass or fail line on its own.
Why is discounted payback longer than payback?
Discounting makes later cash worth less today, so more periods are needed before the discounted total covers the cost. With a rate of zero the two are the same.
Can I enter cash flows that are negative in some periods?
Yes. Enter a negative number for a period with an extra cost. The page reports the first time the running total reaches zero and does not look at what happens after that.
How does the page handle a partial period?
It assumes the cash of the crossing period arrives evenly through that period, so the fraction is the unrecovered amount divided by that period's cash. If cash arrives at the end of the period instead, round up to the whole period.