Payback Period Calculator

What Is the Payback Period?

The payback period measures how long it takes for an investment to generate enough cash flow to recover its initial cost. It answers a simple but important question: “How quickly will I get my money back?”

A shorter payback period means faster recovery of the investment, which reduces risk exposure. The payback period is one of the most intuitive capital budgeting metrics, though it has limitations — it ignores the time value of money and any cash flows that occur after the investment is recovered.

Simple vs. Discounted Payback Period

The simple payback period uses undiscounted cash flows — it treats a dollar received in year 5 the same as a dollar received today. The discounted payback period improves on this by discounting each cash flow to its present value before accumulating.

Because discounted cash flows are smaller than their nominal amounts, the discounted payback period is always longer than or equal to the simple payback period (assuming a positive discount rate). The discounted version is more theoretically sound because it accounts for the time value of money, but both metrics ignore cash flows after the payback point.

How to Read the Cumulative Cash Flow Chart

The chart plots cumulative cash flow on the y-axis against time periods on the x-axis. Two lines are shown: the blue line represents cumulative undiscounted cash flows, and the amber line represents cumulative discounted cash flows.

Both lines start at the negative initial investment and rise as cash flows are received. The point where each line crosses the zero line (shown as a dashed horizontal reference) is the payback point — the moment the investment has been fully recovered. The gap between the two lines illustrates the impact of discounting on recovery time.

Limitations and When to Use Payback Period

• Ignores cash flows after payback: A project with large cash flows in later years may be rejected despite being highly profitable.
• Ignores project scale: Payback period does not account for the size of the investment or the magnitude of returns, so a small project and a large project may appear equally attractive.
• No standard cutoff: There is no universal threshold for what constitutes an “acceptable” payback period — it depends on the industry, project type, and management preferences.
• Simple payback ignores time value of money: The simple version does not discount, which can mislead in environments with high interest rates or long horizons.
• Best used as a supplementary metric: Use payback period alongside NPV, IRR, and profitability index for a complete investment analysis.