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Payback Period Calculator - Simple & Discounted ROI

Calculate investment payback period with simple and discounted methods. Analyze cash flows, determine break-even time, and make informed investment decisions.

Payback Period Calculator

Calculate how long it takes for an investment to pay for itself using simple or discounted payback period methods.

Initial Investment
Calculation Method
Annual Cash Flows
Year 1:
Year 2:
Year 3:
Year 4:
Year 5:

Results

3 years 3 months
Simple Payback Period
$175,000
Total Cash Flows
$75,000
Net Present Value

Analysis

The investment pays back in 3 years and 3 months, which is acceptable for many investments but may be too long for some.

Recommendations

  • •Evaluate this investment against your risk tolerance and alternative opportunities
  • •Consider the time value of money and opportunity costs
  • •Consider using discounted payback period for more accurate analysis

Cash Flow Analysis

YearCash FlowCumulative
1$25,000-$75,000
2$30,000-$45,000
3$35,000-$10,000
4$40,000$30,000
5$45,000$75,000

Categories by Investment Type

Technology Investments2-3 years
Manufacturing3-5 years
Real Estate5-10 years
Energy Projects7-15 years
Infrastructure10-20 years

How to Calculate Payback Period

Simple Payback Period Formula

Payback Period = Initial Investment ÷ Annual Cash Flow

For varying cash flows, find the year when cumulative cash flows equal or exceed the initial investment.

Discounted Payback Period

Discounted CF = Cash Flow ÷ (1 + Discount Rate)^Year

Accounts for the time value of money by discounting future cash flows to present value.

References:

Important Considerations

⚠️ Limitations

  • • Ignores cash flows after payback period
  • • Simple method doesn't consider time value of money
  • • May reject profitable long-term investments
  • • Doesn't measure profitability, only liquidity

💡 Best Practices

  • • Use alongside NPV and IRR analysis
  • • Consider industry benchmarks for payback periods
  • • Account for risk and opportunity costs
  • • Use discounted payback for long-term investments

Tips for Better Analysis

1

Use Realistic Cash Flow Projections

Base estimates on historical data, market research, and conservative assumptions.

2

Consider Multiple Scenarios

Analyze best-case, worst-case, and most-likely scenarios for comprehensive evaluation.

3

Account for Inflation

Use real discount rates or adjust cash flows for inflation effects.

4

Monitor and Update

Regularly review actual vs. projected cash flows and adjust analysis accordingly.

Example Cases

Technology Startup

Investment: $500,000

Cash Flows: $150K, $200K, $250K, $300K, $350K

Simple Payback: 2.5 years

Analysis: Excellent payback period for tech investment

Manufacturing Equipment

Investment: $1,000,000

Cash Flows: $200K, $250K, $300K, $350K, $400K

Discounted Payback (8%): 4.2 years

Analysis: Good payback considering manufacturing industry standards

Frequently Asked Questions

What is payback period in investment analysis?
Payback period is the time required for an investment to generate cash flows sufficient to recover the initial investment cost. It's a simple capital budgeting method that measures how quickly an investment pays for itself.
What's the difference between simple and discounted payback period?
Simple payback period doesn't consider the time value of money, while discounted payback period accounts for the present value of future cash flows using a discount rate. Discounted payback is more accurate for long-term investments.
What is a good payback period for investments?
Generally, payback periods of 2-3 years are considered excellent, 3-5 years are good, and over 5 years may be too long depending on the industry and risk tolerance. Technology investments often aim for 2-3 years, while infrastructure projects may accept 5-10 years.
How do I calculate payback period with varying cash flows?
For varying cash flows, calculate cumulative cash flows year by year until the cumulative amount equals or exceeds the initial investment. The payback period is the point where this occurs, with fractional years calculated proportionally.
What discount rate should I use for discounted payback period?
Use your company's cost of capital, weighted average cost of capital (WACC), or a rate that reflects the investment's risk level. Common rates range from 5-15%, with higher rates for riskier investments.
What are the limitations of payback period analysis?
Payback period ignores cash flows after payback, doesn't consider the time value of money (in simple method), and may reject profitable long-term investments. It should be used alongside other methods like NPV and IRR.

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