Discounted Payback Period Calculator

The discounted payback period calculator shows how long it takes to recover an investment once you allow for the time value of money. Unlike simple payback, which treats every dollar the same regardless of when it arrives, this tool discounts each year of cash flow back to today using a rate you choose, then counts how long the discounted cash flows take to add up to the original cost. You enter the initial investment, an annual discount rate and the level annual cash flow you expect, and it returns the discounted payback period in years, including the fraction of the final year. Business owners, property investors and managers use it for a more realistic read on capital decisions, because money received sooner is worth more than the same amount received later, and the discount rate reflects your cost of capital or the return you could earn elsewhere. The discounted payback is always equal to or longer than the simple payback, since discounting shrinks future cash flows, and that extra honesty is the point. To use it well, pick a discount rate that genuinely reflects your funding cost or required return, often somewhere between the interest rate on borrowing and your target return on investment, and use conservative cash flow estimates. Remember that, like simple payback, this measure still ignores any cash flows that arrive after the breakeven point, so it works best as a risk screen alongside net present value, which captures the full life of a project. A shorter discounted payback means your capital is recovered, in real terms, sooner, which lowers risk and frees money to reinvest. Reviewing it across competing projects helps you favour those that return your money quickly even after accounting for the cost of waiting.

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Initial investment ($)

Discount rate (% per year)

Annual cash flow ($)

4.26 years

Discounted payback period

Each year's cash flow is divided by (1 + rate)^year, then accumulated until it covers the cost. Estimate only, not financial or tax advice.

How it works

Each year's cash flow is discounted by dividing it by one plus the rate raised to the power of the year number. The discounted amounts are added up year by year until they reach the initial cost. The payback is the number of full years plus the fraction of the next year still needed.

Worked example

With $100,000 invested, a 10 percent rate and $30,000 a year, the discounted cash flows are about 27,273, 24,793, 22,539 and 20,490 over the first four years, totalling 95,096. The remaining 4,904 is recovered in year five, which discounts to about 18,628, so 4,904 divided by 18,628 is about 0.26, giving a discounted payback of 4.26 years.

Related calculators

Payback Period Calculator: simple payback.
Effective Annual Rate Calculator: true annual rate.
Free Cash Flow Calculator: cash after capex.
Business Valuation Calculator: value a business.

Frequently asked questions

How is discounted payback different from simple payback?

Simple payback adds up raw cash flows until they equal the cost. Discounted payback first discounts each year of cash flow back to today using your chosen rate, then counts how long they take to recover the cost. Because future dollars are worth less, the discounted payback is always equal to or longer than the simple version.

What discount rate should I use?

Use a rate that reflects your cost of capital or the return you could earn on a similar risk investment. Many businesses use a figure between their borrowing rate and their target return. A higher rate lengthens the payback period.

Does it consider cash flows after payback?

No. Like simple payback, it stops once the cost is recovered and ignores later cash flows. For a full life view of value, use net present value alongside this measure.