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Payback Period Calculator
The payback period is how long it takes for an investment to earn back its cost. It is a simple way to compare projects and equipment purchases.
Payback Period Calculator
Calculate how long it takes to recover your initial investment
4.0
Years to Payback
Full recovery of initial capital
ROI (Annual)
25%
Total Recovery
$10,000
Avg. Monthly Flow
$208.33
Investment Recovery Curve
About the Payback Period Calculator
The payback period is how long it takes for an investment to earn back its cost. It is a simple way to compare projects and equipment purchases.
How to use the Payback Period Calculator
- Enter the Initial Investment and the Annual Cash Flow.
- Optionally adjust the Recovery Percentage and the Growth Rate (Annual %) of the cash flow.
- Press Calculate Payback Period.
Formula and method
Payback period = Initial investment ÷ Annual cash flow. With growing cash flows, add each year's cash flow until the total reaches the investment.
Worked example
A $50,000 machine that generates $12,500 a year pays for itself in 4 years.
A simple case. An investment of 50,000 that returns 12,500 a year pays back in 50,000 ÷ 12,500 = 4 years.
When to use the Payback Period Calculator
- Finding how long an investment takes to earn back its cost.
- Comparing projects by how quickly they pay back.
- Checking whether new equipment is worth buying.
Common mistakes to avoid
- Ignoring what happens after the payback period.
- Ignoring the time value of money.
Tips
- Payback ignores what happens after the break-even point and the time value of money. Use NPV as well.
- Shorter payback means lower risk.
Frequently asked questions
What is a good payback period?
It depends on the industry. Many small businesses look for two to three years or less.
What is a good payback period?
Shorter is better. What counts as acceptable depends on your industry and risk.