Payback Period Calculator
Find out how long an investment takes to repay itself — both in plain cash and after discounting for the cost of capital, which is usually the honest answer and often years further out.
- Updated Aug 17, 2026
- Reviewed by the BSF CPA Editorial Team
- US capital budgeting
- 9 min read
Simple payback cannot see your cost of capital — discounted payback can. A $120,000 investment returning $25,000 a year, growing 3%, pays back in 4.55 years on plain cash no matter what your capital costs. Discount it at 8% and the real answer is 5.79 years; at 20%, 11.09 years. Same investment, same cash, a gap of more than six years.
Enter the upfront investment, the first year's cash flow, an annual growth rate for that cash flow, and your discount rate or cost of capital.
Payback period answers the simplest question in capital budgeting: “How long until I get my money back?” It’s the first risk filter most CFOs apply — projects with payback > 5–7 years rarely survive without strong strategic justification. The calculator does both simple payback (raw cash flows) and discounted payback (factors in the time value of money).
Payback Period Calculator
How many years until your investment pays itself back? Includes discounted payback for time-value-of-money accuracy.
Payback Analysis
How to read your results
| Output | What it means | Why it matters |
|---|---|---|
| Simple payback | Years until cumulative cash equals the investment | Fast and intuitive, but blind to the cost of capital. |
| Discounted payback | The same, after discounting each year's cash | The honest figure. Always longer, sometimes far longer. |
| Year 1 cash flow | What you entered | The base that growth compounds from. |
| 5-year cumulative | Total undiscounted cash over five years | Quick check on whether the horizon is even long enough. |
| 10-year cumulative | Total undiscounted cash over ten years | Shows what the investment produces beyond payback. |
Investment moves in $1,000 steps, cash flow in $500, growth in 0.5 points and the discount rate in 0.25 points. Growth is capped at 50% and the discount rate at 25% — values above those clamp silently. Cash flows are treated as arriving at the end of each year.
What payback measures
Payback answers one narrow question: how long until I have my money back? It is popular because it is intuitive, needs almost no assumptions, and speaks directly to risk — the sooner capital returns, the less exposed you are to forecasts being wrong.
What it does not measure is profitability. An investment that repays in three years and then stops is worse than one that repays in five and runs for twenty, but payback ranks the first one higher. It is a liquidity and risk screen, not a value test — useful alongside NPV and IRR, dangerous on its own.
The formula
There is no single closed-form expression, because payback usually lands part-way through a year. The calculator accumulates cash flows year by year and interpolates within the year the total crosses the investment:
discounted flow = cash flow ÷ (1 + d)t
accumulate until cumulative ≥ investment, then:
payback = (t − 1) + (investment − cumulative before) ÷ (flow in year t)
- CF₁ First-year cash flow, received at the end of year 1.
- g Annual growth applied to the cash flow thereafter.
- d Discount rate — your cost of capital or required return.
Setting the discount rate to zero makes discounted payback identical to simple payback, which is a useful way to see exactly what discounting is costing you.
Simple vs discounted
This is the distinction the calculator exists to show. Take a $120,000 investment returning $25,000 in year one, growing 3% a year, and vary only the discount rate:
| Discount rate | Simple payback | Discounted payback | Difference |
|---|---|---|---|
| 0% | 4.55 yrs | 4.55 yrs | — |
| 5% | 4.55 yrs | 5.25 yrs | +0.70 |
| 8% | 4.55 yrs | 5.79 yrs | +1.24 |
| 12% | 4.55 yrs | 6.76 yrs | +2.21 |
| 16% | 4.55 yrs | 8.24 yrs | +3.69 |
| 20% | 4.55 yrs | 11.09 yrs | +6.54 |
Look at the middle column: 4.55 years at every discount rate. Simple payback is structurally incapable of responding to the cost of capital. A business funded by 20% capital and one funded by retained cash get the identical answer, which is exactly why the figure is so often over-trusted.
Notice too that the gap grows non-linearly. Doubling the discount rate from 8% to 16% does not double the gap — it triples it, because discounting compounds against the later years that slow-paying investments depend on.
Three worked examples
$120,000 investment, $25,000 year-one cash flow, 3% growth, 8% discount rate
Simple payback 4.55 years, discounted payback 5.79 years. Cumulative cash reaches $132,728 by year 5 and $286,597 by year 10 — so if the equipment lasts a decade, most of its value arrives after the payback point. Judging it on payback alone would understate it badly.
$50,000 investment, $15,000 year-one saving, 5% growth, 10% discount rate
Simple payback 3.16 years, discounted 3.92 years. Five-year cumulative saving is $82,884. Under a common three-year payback rule this project fails on the discounted measure and passes on the simple one — the sort of borderline case where knowing which measure your policy actually uses matters.
$200,000 investment, $20,000 year-one cash flow, 10% growth, 12% discount rate
Simple payback 7.26 years; discounted payback 12.39 years — a gap of 5.13 years. Strong growth cannot rescue a project whose early cash flows are small relative to the outlay, because discounting bites hardest exactly where this project is weakest: the distant years.
When it never pays back
Here is the case that makes simple payback genuinely dangerous. A $100,000 investment returning a flat $8,000 a year:
| Discount rate | Simple payback | Discounted payback |
|---|---|---|
| 5% | 12.50 yrs | 20.11 yrs |
| 8% | 12.50 yrs | Never |
| 10% | 12.50 yrs | Never |
Simple payback reports a finite, reassuring 12.5 years at every rate. But at an 8% cost of capital the entire infinite stream of $8,000 payments is worth exactly $100,000 in today's money — it breaks even only in the limit and never actually crosses. At 10% that stream is worth just $80,000, so the investment destroys $20,000 of value while simple payback still says twelve and a half years.
If discounted payback returns Never, the project has a negative net present value and should be rejected regardless of how comfortable the simple figure looks. A finite simple payback is not evidence that an investment is worth making.
The effect of growth
Growth shortens both measures, but less than most people expect. Same $120,000 investment and $25,000 opening cash flow at an 8% discount rate:
| Annual growth | Simple payback | Discounted payback |
|---|---|---|
| 0% | 4.80 yrs | 6.30 yrs |
| 3% | 4.55 yrs | 5.79 yrs |
| 6% | 4.34 yrs | 5.40 yrs |
| 10% | 4.11 yrs | 5.00 yrs |
Ten points of annual growth — an aggressive assumption — buys only 0.69 years on simple payback and 1.30 on discounted. Because payback is decided in the early years, and growth has barely compounded by then, it is a weak lever. The size of the first year's cash flow matters far more than how fast it grows.
What payback cannot tell you
Anything after the payback point
A project repaying in 4 years then running 20 more scores identically to one that repays in 4 and stops. In Example 1, $286,597 of ten-year cash is invisible to the measure.
Total profitability
Payback is a duration, not a return. Use NPV for value created and IRR for the rate earned; payback only tells you how long your capital is exposed.
Irregular cash flows
This tool assumes one opening figure growing at a constant rate. Lumpy or seasonal flows need a full NPV schedule.
Salvage value and tax
Terminal value, tax shields on depreciation and disposal proceeds are all excluded. Each can materially change a marginal decision.
Common mistakes
Using simple payback for capital decisions
It cannot see your cost of capital. At a 20% discount rate it understated the real payback by more than six years in the table above.
Confusing cash flow with profit
Payback needs cash. Add back depreciation and other non-cash charges; accounting profit will understate the cash available.
Applying a rule of thumb without a basis
"Under three years" is common but arbitrary. The threshold should reflect asset life and how confident you are in the forecast.
Rejecting long-payback projects automatically
Infrastructure and capacity investments often pay back slowly and create most of their value afterwards. Check NPV before declining.
Using the wrong discount rate
Use your weighted cost of capital, or the return available on the next-best use of the money — not your loan rate alone.
Forecasting growth optimistically
Growth barely moves payback, so an optimistic rate adds risk without improving the number much. Model 0% growth as your base case.
Best practices
Read the discounted figure first
Treat simple payback as context. The discounted number is the one that reflects what capital actually costs you.
Compare payback to asset life
A 5.79-year payback on a ten-year asset is comfortable; the same payback on a six-year asset leaves almost no margin.
Pair it with NPV
Payback screens for risk and liquidity; NPV decides value. Use payback to shortlist, NPV to choose.
Test the downside
Re-run at zero growth and a higher discount rate. If payback still fits inside the asset's life, the case is robust.
Frequently asked questions
What is the difference between simple and discounted payback?
Simple payback adds up cash as it arrives. Discounted payback reduces each year's cash to today's value first, so it reflects the cost of capital. Discounted payback is always the longer of the two unless the discount rate is zero.
What is a good payback period?
It depends on asset life and risk tolerance. Many businesses use two to three years for equipment and technology, longer for property or infrastructure. The useful test is whether payback comfortably precedes the end of the asset's life.
Why does it say "Never"?
Because the discounted cash flows never accumulate to the investment. That means a negative net present value — the project destroys value and should be rejected, however reasonable the simple payback looks.
What discount rate should I use?
Your weighted average cost of capital, or the return you could earn on the next-best use of the same money. Small businesses often use 8–15%. Higher risk warrants a higher rate.
Should I use profit or cash flow?
Cash flow. Add back depreciation and amortisation to accounting profit, since those are non-cash charges. Payback measures when actual money returns, not when the books show a profit.
Why is payback criticised?
Because it ignores everything after the payback point and, in its simple form, the time value of money. It rewards short projects over valuable ones. It is a risk screen, not a profitability measure.
Can I model uneven cash flows?
Not here — the tool assumes one opening figure growing at a constant rate. For irregular flows, build a year-by-year schedule and use NPV or IRR instead.
How does payback relate to NPV?
Discounted payback tells you when cumulative NPV turns positive; NPV tells you how positive it eventually gets. If discounted payback is finite and shorter than the asset's life, NPV over that life is positive.
Does growth make much difference?
Less than you would expect. Going from 0% to 10% annual growth cut discounted payback only from 6.30 to 5.00 years in our example, because payback is decided early, before growth has compounded.
Should the investment include installation and training?
Yes — use the full cost of getting the asset productive, including installation, training, integration and any working capital tied up. Understating the outlay flatters the payback.
Why are growth and discount rate capped?
The inputs accept a maximum of 50% growth and 25% discount rate, and clamp silently above those. The caps sit well beyond realistic planning assumptions for most businesses.
Does payback account for inflation?
Only if you build it in. Either use nominal cash flows with a nominal discount rate, or real cash flows with a real rate. Mixing the two — real flows against a nominal rate — overstates payback.
Methodology & sources
Cash flows are treated as arriving at the end of each year, with the first year's figure growing at the stated rate thereafter. The calculator accumulates flows year by year and interpolates linearly within the year the cumulative total crosses the investment, which is the standard textbook approach. Discounted payback applies the discount rate to each year's flow before accumulating; where discounted flows never reach the investment, the result is reported as "Never", indicating a negative net present value. Salvage value, tax, depreciation shields and working capital movements are excluded. Growth accepts up to 50% and the discount rate up to 25%.
- Standard capital budgeting methodology as applied in US managerial accounting and corporate finance practice.
- US Small Business Administration — capital investment planning guidance.
- All figures independently modelled and verified against the live calculator.
Related resources
- IRR CalculatorThe return rate, not just the duration
- ROI CalculatorTotal return on the investment
- Break-Even CalculatorVolume needed to cover costs
- Cash Flow CalculatorWhether you can fund the outlay
- Working Capital CalculatorCapital tied up alongside the asset
- All CalculatorsThe full BSF library
Check the discounted number, not the comfortable one
Set the discount rate to your real cost of capital and see how far the honest payback sits from the simple one.
Goes deeper on this
13-Week Cash Flow Forecast (Excel)
The rolling quarter-ahead forecast lenders ask for and owners actually use. It flags the week you run short, not the week after.
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