Payback Period Calculator
Calculate payback periods, discounted payback periods, and average returns.
Fixed Cash Flow
Payback Period: years
Discounted Payback Period: years
Average Return:
Payback period vs. discounted payback period
The simple payback period divides the initial investment by the annual cash flow, assuming equal cash flows each year and ignoring the time value of money. The discounted payback period accounts for the fact that a dollar received in the future is worth less than a dollar today, so it takes longer to "recover" the investment once each year's cash flow is discounted back to present value.
Frequently asked questions
Why is the discounted payback period always longer? Discounting reduces the value of future cash flows, so it takes more nominal years of (shrinking, in present-value terms) cash flow to add up to the original investment amount.
What counts as a "good" payback period? There's no universal answer — it depends on the industry and the alternative uses for the capital, but shorter payback periods are generally considered lower-risk since the investment is recovered sooner.
What's a limitation of payback period as a decision tool? It ignores any cash flows that occur after the payback point, so two investments with the same payback period could have very different total returns — that's why payback period is often used alongside NPV or IRR rather than alone.