Marketing & Finance
Payback Period Calculator
How long does it take to earn back an investment, with and without discounting?
- Time: 3 minutes
- With: Anyone judging an investment
- You get: Payback in years and months and a cumulative cash flow table
How to use this worksheet
- Enter the upfront investment and the average yearly net cash flow it produces.
- Add a discount rate if you want to account for the time value of money. The discounted payback is always longer.
- Read the table: the highlighted year is when the cumulative position turns positive.
Investment and cash flow
Use the same currency and net cash flow after running costs.
Write down where the numbers come from and what would change them.
Prompts and example
Example
Assumes the machine runs two shifts from year one.
Results
Before you finish
- Cash flows are net of running costs and taxes.
- You tested a pessimistic cash flow as well.
- You compared with another use of the same money.
About payback
Payback = initial investment / yearly cash flow. It answers "when do I get my money back?" and is popular because it is simple and focuses on risk and liquidity.
Its weakness is that it ignores everything after payback. A project with a short payback but no later cash flow can be worse than one that pays back slowly but earns for decades. Use it together with ROI or NPV.
Recommended reading
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- Corporate FinanceStephen Ross, Randolph Westerfield, Jeffrey Jaffe
Comprehensive guide to corporate finance including capital budgeting, payback period, and investment evaluation methods.