Payback Period Calculator
Calculate simple and discounted payback period for investments.
Examples
Equipment Investment
Frequently Asked Questions
What is the difference between simple and discounted payback?
What is a good payback period?
What is the profitability index?
Quick Tips
Double check your inputs. Ensure units match (e.g., inches vs cm).
How to Use This Calculator
Enter the initial investment amount, expected annual cash flow, discount rate, and project life. Optionally set a cash flow growth rate for increasing returns over time. The calculator shows both the simple and discounted payback periods, along with NPV and profitability index.
Understanding the Formula
Simple Payback = Year before recovery + (Unrecovered cost / Cash flow in recovery year). Discounted Payback uses the same approach with discounted cash flows. NPV = Sum of [CF_t / (1+r)^t] - Initial Investment. Profitability Index = PV of future cash flows / Initial Investment.
Examples
Equipment Investment
A $100,000 machine generates $25,000/year in cash flow. Simple payback is 4 years ($100K / $25K). With a 10% discount rate, the discounted payback is longer at approximately 5.4 years due to the time value of money.
Frequently Asked Questions
What is the difference between simple and discounted payback?
Simple payback ignores the time value of money and just counts how long until cumulative cash flows equal the investment. Discounted payback uses present values, making it more accurate but resulting in a longer payback period.
What is a good payback period?
It depends on the industry and risk. Generally, shorter is better. Many companies use 3-5 year thresholds. High-risk projects may require 2 years or less, while infrastructure projects may accept 10+ years.
What is the profitability index?
The profitability index (PI) is the ratio of the present value of future cash flows to the initial investment. A PI greater than 1.0 indicates the project creates value. Higher PI values indicate more attractive investments.