Payback period calculator (simple and discounted)
Enter your values. The answer and the full worked solution update as you type.
Result
| Year | Cash flow | Cumulative | Discounted cash flow | Cumulative (discounted) |
|---|---|---|---|---|
| 0 | −€50 000.00 | −€50 000.00 | −€50 000.00 | −€50 000.00 |
| 1 | €12 000.00 | −€38 000.00 | €11 111.11 | −€38 888.89 |
| 2 | €15 000.00 | −€23 000.00 | €12 860.08 | −€26 028.81 |
| 3 | €18 000.00 | −€5 000.00 | €14 288.98 | −€11 739.83 |
| 4 | €20 000.00 | €15 000.00 | €14 700.60 | €2 960.77 |
| 5 | €10 000.00 | €25 000.00 | €6 805.83 | €9 766.60 |
Find how long it takes to recover an investment. Enter the initial investment, the cash flow of each year and the discount rate. The calculator gives the simple payback period, the discounted payback period and the NPV, with a table of the cumulative and discounted cash flows, and interpolates within the year in which the investment is recovered.
Step-by-step solution
Simple payback
Discounted payback
NPV
Key formulas
- Payback period
- full years before recovery + amount still to recover / cash flow of the next year
- Discounted cash flow
- CFk/(1 + r)k
- Net present value
- NPV = −I0 + Σ CFk/(1 + r)k
How to calculate the payback period
- Start with the investment as a negative amount and add the cash flows year by year.
- Find the last year in which the cumulative total is still negative.
- Payback = that number of years + (amount still to recover / cash flow of the next year), assuming the cash flow comes in evenly over the year.
- For the discounted payback, first divide each cash flow by (1 + r)ᵏ, then do the same.
- Compare with the target payback period, and check the NPV as well.
Questions and answers
Why is the discounted payback longer?
Discounting makes later cash flows worth less today, so it takes longer before they add up to the investment. If the discounted payback never arrives, the NPV over that period is negative.
What are the weaknesses of the payback period?
It ignores everything that happens after the payback date, and the simple version ignores the time value of money. A project with a quick payback can still have a lower NPV than a slower one.
What if a later cash flow is negative?
The calculator reports the first moment at which the cumulative total becomes positive. If a later outflow pushes it below zero again, look at the table: the investment is then not permanently recovered at that point.
Is the interpolation within the year correct?
It assumes the cash flow arrives evenly during the year. If the cash comes in at the end of the year, round the payback up to the whole year.
Practise it yourself
Practise NPV & IRR
A calculator gives the answer. In the exam you need the method: practise it with new problems, hints and worked solutions.