What is a good payback period?

There is no single right answer, as it depends on the type of investment and your appetite for risk. Many businesses look for equipment or fit out spending to pay back within two to four years. Shorter is generally safer because your capital is at risk for less time.

Does this account for the time value of money?

No. Simple payback treats a dollar received in year five the same as a dollar today. If you want to allow for the cost of money over time, use the discounted payback period calculator instead.

What cash flow figure should I enter?

Use the additional yearly cash the investment generates or saves, after running costs, rather than accounting profit. Be realistic and lean towards a conservative estimate. This keeps the payback period honest.

Payback Period Calculator

The payback period calculator tells you how long it takes to recover the money you put into a project or investment from the cash it generates each year. You enter the initial cost and the annual cash flow you expect to receive, and the tool returns the payback period in years, including a fractional final year so the answer is precise rather than rounded up. Payback period is one of the simplest and most popular capital budgeting measures, used by small business owners, property investors, managers and anyone weighing up whether an outlay on equipment, a fit out, software or marketing will pay for itself in a reasonable time. The appeal is speed and clarity, a shorter payback means your money is at risk for less time and is freed up sooner to reinvest. To use the tool well, base the annual cash flow on the extra cash the investment actually brings in or saves, not accounting profit, and use a realistic, conservative figure rather than a best case. Keep in mind the main limitation of simple payback, it ignores the time value of money and any cash flows that arrive after the breakeven point, so a project with a quick payback is not automatically the most valuable one over its full life. For larger or longer term decisions, also look at discounted payback, net present value and the return on the investment. Used as a first filter, the payback period is a fast, intuitive way to screen options and rule out anything that ties up your capital for too long before you study the strongest candidates in more depth.

Initial investment ($)

Annual cash flow ($)

3.33 years

Payback period

Payback = initial cost / annual cash flow. Estimate only, not financial or tax advice.

How it works

With an even annual cash flow, the payback period is the initial cost divided by the yearly cash flow. The whole number is the years of full cash flows needed and the decimal is the fraction of the next year required. With a 100,000 cost and 30,000 a year, payback is 100,000 divided by 30,000.

Worked example

With an initial investment of $100,000 and annual cash flow of $30,000, three full years return $90,000, leaving $10,000 to recover. That last $10,000 is 10,000 divided by 30,000 of a year, about 0.33, so the payback period is 3.33 years.

Related calculators

Discounted Payback Period Calculator: payback with discounting.
Effective Annual Rate Calculator: true annual rate.
Free Cash Flow Calculator: cash after capex.
Cash Flow Calculator: net cash position.

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