Payback period calculator

What the payback period tells you

The payback period is the time a project needs to earn back the money put into it. It is popular with owners of small businesses because it answers a plain question — when am I whole again? — and because the inputs are easy to forecast for the near future. OpenStax's Principles of Finance defines it as the time it takes to recover the initial cost of the investment. The calculator gives two versions, the simple one and the discounted one, plus the profitability index, which many courses teach next to them.

How it is calculated

Put the investment in the first line as a negative number (period 0) and the expected cash flows of each later period below it. Add them up period by period. In the first period where the running total is zero or more, the payback happens somewhere inside that period. With t the last period where the total is still negative, the payback is t + (unrecovered amount at the end of t) ÷ (cash flow of period t + 1). This is the formula in OpenStax §16.4, where it is applied to discounted flows.

For discounted payback each flow Cₜ is replaced by Cₜ ÷ (1 + r)ᵗ, with r the discount rate per period, and the same procedure is repeated. The profitability index is PV(inflows) ÷ PV(outflows). Both are computed from the same discounted values, so a project with a PI above 1 also has a positive NPV, and a discounted payback that exists within the forecast horizon.

Worked example

OpenStax's example is an embroidery machine for a sporting-goods shop. It costs $16,000 and brings in $2,000, $4,000 and then $5,000 a year for four more years. The cumulative cash is −$16,000, −$14,000, −$10,000, −$5,000, $0 at the end of years 0 to 4, so the simple payback is exactly 4.00 years. With a 9% cost of funds the discounted cumulative values are −$16,000.00, −$14,165.14, −$10,798.42, −$6,937.50, −$3,395.37, −$145.72, $2,835.62. The balance turns positive in year 6, so the discounted payback is 5 + 145.72 ÷ 2,981.34 = 5.05 years. The present value of the inflows is $18,836, giving a profitability index of 1.18 and an NPV of $2,836.

These are the textbook's numbers, entered here as the default values; the calculator reproduces them. Replace them with your own forecast, and rerun it with a more cautious rate and with smaller cash flows to see how fragile the answer is.

Where the payback period misleads

First, it stops looking at the point of recovery. The two projects in the last question below have the same payback, yet one of them keeps paying; OpenStax names this as a serious drawback when mutually exclusive projects are compared. Second, the simple version ignores the time value of money, which makes it too optimistic: in the example it understates the real breakeven by about a year. Third, the cutoff is arbitrary, since there is no theory to say how long is long enough.

The discounted version fixes the second problem only. It still ignores everything after recovery, so it is a screening tool: use it to drop projects that take too long, and use NPV or IRR to decide between the ones that remain. Also remember that every figure rests on forecast cash flows, and the earliest years are forecast best.

What is a good payback period?

There is no number that is good for every business. OpenStax's Principles of Finance points out that payback has no theoretical basis for an acceptable length, so managers pick a cutoff from experience: a few months for a software subscription, several years for a machine, and longer for a building. Compare the result with how long you can wait for your money and with how long the equipment or contract will actually last. A payback of 4 years on an asset that wears out in 3 is a loss no matter what the cutoff says.

What is the difference between simple and discounted payback?

Simple payback adds up the cash flows as they are and asks when the total reaches zero. Discounted payback first divides each flow by (1 + rate) raised to its period, so later money counts for less, and then asks the same question. With the example flows the simple payback is 4.00 periods and the discounted payback at 9% is 5.05; at 20% the investment is not repaid within these periods, and at 0% the two are identical (4.00). The discounted figure is always the longer one when the rate is above zero.

What is the profitability index?

The profitability index (PI) is the present value of the cash coming in divided by the present value of the cash going out, using the same discount rate as NPV. OpenStax's rule is to accept when PI is above 1 and reject when it is below 1, which always gives the same accept-or-reject answer as NPV. In the example the inflows are worth $18,836 today against $16,000 paid out, so PI is 1.18, and the NPV is $2,836. PI is useful for ranking projects when money is limited, because it shows value per dollar invested.

How do I enter monthly or quarterly cash flows?

Use one line per period and a discount rate for the same period. If the flows are monthly, divide a yearly rate by 12 (a rough conversion) or convert it exactly with (1 + yearly rate)^(1/12) − 1. The answer then comes back in months. Mixing a yearly rate with monthly lines is the most common reason the discounted result looks far too good.

Why does the calculator show a fraction of a period?

The last period before payback is split in proportion: the amount still unrecovered at the start of that period divided by that period's cash flow. This assumes the money arrives evenly through the period. If the cash really arrives in one lump at the end, the payback is the whole period, not the fraction, so read the table of cumulative amounts as well.

Can payback be used to choose between two projects?

Only as a first screen. It cannot see anything after the point where the money is recovered. Project A returns 500 and 500 and then nothing; project B returns 500, 500, 600 and 600; both cost 1,000 and both pay back in 2.00 periods. At 10%, A has an NPV of −$132.23 and B of $728.37. Payback alone would call them equal.

Sources, checked October 28, 2026: OpenStax, Principles of Finance, section 16.4 “Alternative Methods” (payback, discounted payback, profitability index and their weaknesses; the example is paraphrased) and the chapter 16 key terms. Related: NPV calculator (simple payback, NPV and IRR), IRR calculator, present value calculator, ROI calculator and break-even calculator.

Estimates for planning only — not financial, tax or legal advice. Your own forecasts, contracts and advisers decide. How we check our calculators.