What Is the Discounted Payback Period?
The discounted payback period is how long an investment takes to earn back its cost, counting what future money is worth today. A dollar received in five years is worth less than a dollar now, because you could have invested today's dollar in the meantime. So each year's cash flow is discounted before it's counted.
Discounted payback vs simple payback
- Simple payback: adds up the cash flows as they are. It's quick, but treats a dollar in year 5 the same as a dollar today.
- Discounted payback: discounts each cash flow first, so it's always the same or longer, and closer to the true cost of waiting.
- The limit of both: they ignore any cash that comes after the payback point, so also check the NPV before choosing a project.
Which calculator should I use?
- This calculator: when timing matters, such as long projects or high rates. It counts what future money is worth today.
- Payback Period calculator: for a quick first look, when you just want to know how soon the cash comes back.
How to Calculate the Discounted Payback Period
First, find each year's present value and add it to the running total, starting from the investment:
Then take the last year the running total is below zero, and add the part of the next year needed to reach zero:
- CF: the cash flow in year t.
- r: the discount rate.
- t: the year.
- Y: the last year the running total is below zero.
This assumes each year's cash arrives evenly through that year. If a later negative cash flow pushes the total back below zero, the calculator counts the point where it turns positive for good.
Example
A $2,500 investment with cash flows of $500, $600, $700, $800 and $900, at an 8% discount rate:
- Present values: $462.96, $514.40, $555.68, $588.02, $612.52
- The running total is still -$378.93 after year 4, and year 5 adds $612.52.
- Payback: 4 + $378.93 ÷ $612.52 = 4.619 years
- Simple payback, without discounting, is 3.875 years.
How to Use the Discounted Payback Period Calculator
"If I invest $2,500 and get back $500, $600, $700, $800 and $900 over five years, and my money could earn 8% elsewhere, how long until I really have it back?" This calculator answers that.
Let's enter the numbers for this example in each box. They are already filled in when the calculator opens, so you can follow along and then change any box to match your own investment.
Irregular Cash Flows tab
- Initial Investment: Enter 2,500, which is what you pay at the start. Enter a positive number; the calculator treats it as money going out.
- Discount Rate: Enter 8, which is the yearly return your money could earn elsewhere. It must be from 0 to 99.99.
- Number of Years: Choose 5, which is how many years of cash flows you have, from 1 to 12.
- Year 1 to Year 5: Enter 500, 600, 700, 800 and 900, which is the cash you receive each year. A year can be negative if the investment costs you money that year.
Fixed Cash Flows tab
Use this tab when the cash flow is the same each year, or changes by a steady percent. Its defaults pay back in 3.934 years.
- Initial Investment: Enter 2,500, which is what you pay at the start.
- Discount Rate: Enter 10, which is the yearly return your money could earn elsewhere.
- Number of Years: Enter 5, which is how many years the cash flow lasts. It must be a whole number from 1 to 100.
- Yearly Cash Flow: Enter 800, which is the cash you receive in the first year. It must be greater than 0.
- Yearly Increase: Enter 0, which is how much the cash flow changes each year, in percent. Enter a negative number for a decline.
Calculate and Reset
Click Calculate to see your results. If a box has a problem, such as an investment of 0, a message pops up under that box instead. With the default numbers on the first tab you get:
- Your Results: a short summary in words: the discounted payback (4.619 years), the NPV, and the simple payback. If the investment isn't paid back, it says how much is still short.
- Discounted Payback Period: the headline number.
- Simple Payback, NPV, Total Cash In and Discount Cost: 3.875 years, $233.60, $3,500.00 and $766.40. Discount Cost is how much of the cash coming in is lost to waiting for it.
- Running total chart: a bar for each year, red while the investment isn't paid back and green once it is. The sloping dashed line shows the total without discounting, and the vertical dashed line marks the payback, with its number above. A link under it opens the Payback Period calculator with your numbers filled in.
- Yearly Schedule: each year's cash flow, present value and running total. Download Excel saves it with the formulas, so you can change a number and see the payback update.
- Share Results: a link that opens this calculator with your numbers filled in. Copy it, or share it on Facebook or X.
Amounts of $1 million or more are shortened, for example $1.25M. Click Reset to put the boxes on the current tab back to their defaults and show the default results again.