What Is the Payback Period?
The payback period is how long an investment takes to earn back its cost. If you pay $100,000 for an apartment that brings in $24,000 of rent a year, it pays back in a little over 4 years. It's a quick way to see how long your money is tied up: the shorter the payback, the sooner you have your money back.
Strengths and limits
- Simple and fast: it needs only the cost and the cash coming in, and it's easy to explain.
- It ignores the time value of money: a dollar in year 5 counts the same as a dollar today.
- It ignores cash after the payback point: a project that pays off slowly but earns far more in the end can look worse than it is.
Which calculator should I use?
- This calculator: for a quick first look, when you just want to know how soon the cash comes back.
- Discounted Payback Period calculator: when timing matters, such as long projects or high rates. It counts what future money is worth today.
How to Calculate the Payback Period
When the cash flow is the same every year, divide the cost by the yearly cash flow:
When it changes from year to year, keep a running total starting from the investment. Then take the last year the total is below zero, and add the part of the next year needed to reach zero:
Here Y is 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 $1,000 investment with cash flows of $500, $400, $300 and $100:
- Running total: -$1,000.00, -$500.00, -$100.00, $200.00, $300.00
- It's still -$100.00 after year 2, and year 3 brings in $300.00.
- Payback: 2 + $100.00 ÷ $300.00 = 2.333 years
How to Use the Payback Period Calculator
"If I invest $1,000 and get back $500, $400, $300 and $100 over four years, how long until I have my money 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 1,000, which is what you pay at the start. Enter a positive number; the calculator treats it as money going out.
- Number of Years: Choose 4, which is how many years of cash flows you have, from 1 to 12.
- Year 1 to Year 4: Enter 500, 400, 300 and 100, 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 4.167 years.
- Initial Investment: Enter 2,500, which is what you pay at the start.
- 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 600, 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 payback (2.333 years) and the gain by the end. If the investment isn't paid back, it says how much is still short.
- Payback Period: the headline number.
- Total Cash In, Net Gain, Total Return and Average Cash per Year: $1,300.00, $300.00, 30% and $325.00.
- Running total chart: a bar for each year, red while the investment isn't paid back and green once it is. The vertical dashed line marks the payback, with its number above. A link under it opens the Discounted Payback Period calculator with your numbers filled in.
- Yearly Schedule: each year's cash flow 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.