Payback period is the simplest capital budgeting metric: how long until cumulative cash inflows equal the initial investment. It is popular for quick screening because it is intuitive and emphasizes liquidity. However, simple payback ignores the time value of money and all cash flows after the payback point — always supplement with NPV or IRR for investment decisions.
How to use this calculator
- Enter the total initial investment (capital outlay).
- Enter the expected annual cash flow (assumed level each year).
- Review payback in years and months.
- Compare payback to your firm's maximum acceptable payback threshold.
- Run the NPV calculator for a complete value assessment.
Formula
Simple payback period = Initial investment ÷ Annual cash flow. This assumes equal cash flows each year with no discounting. Payback months = Payback years × 12.
Example
A $100,000 investment generating $35,000 per year pays back in approximately 2.86 years (about 34 months). Cash flows after year 2.86 are ignored in this metric.
Frequently asked questions
What is an acceptable payback period?
Varies by industry and risk. Technology firms may require under 2 years; infrastructure projects may accept 7–10 years. Set a threshold based on project risk and capital availability.
What is discounted payback?
Discounted payback applies a discount rate to cash flows before summing — it accounts for time value of money. This calculator uses simple (undiscounted) payback for speed and clarity.
Why is payback popular despite its flaws?
It is easy to communicate to non-finance stakeholders and highlights liquidity risk. Small businesses and capital-constrained firms use it as a first-pass filter before deeper NPV analysis.
What if cash flows are uneven?
This calculator assumes level annual flows. For uneven cash flows, sum period by period until cumulative inflows equal the investment, or use the NPV calculator with the full cash flow series.