$5k spend returning $1.5k/year
- Payback ≈ 3.33 years
finance calculator
Payback Period Calculator
Estimate how long it takes for an investment or project to repay its initial cost.
Results
- Payback period (years)
- 3.33
How to use this calculator
- Enter the upfront investment amount.
- Enter expected average annual cash flow or savings.
- See the simple payback period in years.
Inputs explained
- Initial investment
- Upfront project cost or purchase price.
- Annual cash flow
- Average yearly net inflow or savings after expenses.
How it works
Payback period = Initial investment ÷ annual cash flow. It assumes uniform cash flows and ignores time value of money.
Formula
Payback = Initial ÷ Annual cash flow
When to use it
- Screening projects or equipment purchases before building a full financial model.
- Presenting a quick break-even timeline to stakeholders.
- Comparing multiple options when time value of money is a secondary concern.
Tips & cautions
- If cash flows vary, use a realistic average or move to NPV/IRR for better accuracy.
- Be conservative on savings/earnings estimates to avoid overpromising payback speed.
- Pair with NPV to capture discount rates and uneven cash flows.
- Ignores time value of money and cash flow timing.
- Assumes positive, fairly uniform annual cash flow; negative or zero inflows make payback undefined.
- No salvage/residual value or maintenance costs included unless baked into cash flow.
Worked examples
$20k asset saving $4k/year
- Payback = 5 years
Deep dive
This payback period calculator divides the initial investment by annual cash flow to show simple payback in years. Enter upfront cost and yearly savings/earnings for a quick break-even view.
Use it to screen projects before running NPV or IRR. It’s a rough metric—discount rates, variable cash flows, and salvage value need fuller models.
FAQs
- Does this account for discount rates?
- No. Use the Net Present Value calculator when you need time value of money. Payback is a quick sanity check.
- What about uneven cash flows?
- Aggregate the average yearly cash flow, or use a spreadsheet to handle variable years.
- Is payback the same as ROI?
- No. Payback measures time to recover cost; ROI measures return relative to cost. They answer different questions.
- What if annual cash flow is zero or negative?
- Simple payback can’t be calculated without positive inflows. Revisit assumptions or use a different metric.
- Should I include maintenance or residual value?
- Not directly. Subtract maintenance from annual cash flow and include salvage separately in a more detailed model.
Related calculators
Ignores taxes, financing, and time value. Use NPV or IRR for detailed capital budgeting.