How to use the Payback Period
- Enter the upfront investment.
- Enter the expected cash inflow for each period.
- Read the simple payback period in years and months.
- Compare against the discounted payback if the recovery takes several years.
How the calculation works
With even cash flows, payback is simply cost ÷ annual inflow. With uneven flows it is found by accumulating inflows until they reach the initial cost, interpolating within the crossing year. Discounted payback repeats the exercise on present values, which always lengthens the period and gives a more honest answer for anything recovering over more than two or three years.
The measure's blind spot is everything beyond break-even. A project paying back in two years and then stopping looks better than one paying back in four and running profitably for a decade, so payback should never be the deciding criterion on its own. Its legitimate use is as a risk filter — in volatile markets or with uncertain technology, a shorter exposure genuinely is safer regardless of projected totals.
Even flows: payback = cost / annual cash flow ; uneven: accumulate until Σ CF ≥ cost, interpolating the final yearSource: Standard capital budgeting payback and discounted payback methods.
Worked example
A 96,000 machine returning 28,000, 34,000, 31,000 and 30,000 over four years.
- After year 1: 28,000 recovered, 68,000 outstanding.
- After year 2: 62,000 recovered, 34,000 outstanding.
- Year 3 brings 31,000 — still 3,000 short at year end.
- Year 4 covers the rest in 3,000 / 30,000 = 0.1 of a year.
Simple payback is 3.1 years. Discounted at 10% it stretches to roughly 3.8 years.
Frequently asked questions
What is a good payback period?+
It depends on the sector and the asset's life. Under two years is usually compelling for equipment; infrastructure and property routinely accept much longer horizons.
Why use payback if NPV is better?+
Because it measures a different thing — how long your capital is exposed. It is a useful screen alongside NPV, not a replacement for it.
What is discounted payback?+
The same calculation applied to present values rather than nominal cash. It is always longer and is the fairer figure for multi-year recoveries.
What does payback ignore?+
Everything after break-even, including salvage value and the bulk of a long-lived asset's returns. That omission is exactly why it must be paired with NPV.
Last reviewed August 31, 2026. We review this page whenever the underlying formula, tax year, published rate or standard changes.