How to Calculate the Payback Period (Simple and Discounted)

Published October 12, 2026

Free tool: Payback Period Calculator→

The payback period is how long an investment takes to earn back what it cost. It's one of the simplest ways to judge equipment, solar panels, a marketing campaign or a small business project, and a quick way to compare risk: the sooner you're paid back, the less can go wrong. This guide shows how to calculate it, simple and discounted, using the free Payback Period Calculator.

Simple payback

With equal yearly cash flows:

Payback period = initial investment ÷ yearly cash flow

Example: a $100,000 investment that brings in $25,000 a year pays for itself in $100,000 ÷ $25,000 = 4 years.

With uneven cash flows, add them up year by year until the total reaches the investment, then work out the fraction of the final year.

Discounted payback

Money received in later years is worth less today. The discounted payback period first converts each year's cash flow to today's dollars at a discount rate, then counts how long those discounted amounts take to repay the investment.

At a 10% discount rate, the same $25,000 a year is worth $22,727 in year 1, $20,661 in year 2, and less each year after. The investment is repaid in 5 years 4 months instead of 4 years.

Growing cash flows

If the cash flow grows 5% a year, payback comes sooner: about 3 years 9 months simple, or 4 years 10 months discounted. Over the 10-year project, the cash flows total $314,448, a net return of about $214,448 on the $100,000.

When it's never paid back

Some investments don't pay for themselves within their useful life. At $9,000 a year over 10 years, the $100,000 is never recovered, a net loss of $10,000. At $15,000 a year, the simple payback is 6 years 8 months, but at a 10% discount rate the investment still isn't recovered within 10 years. The calculator shows "Not recovered" in these cases.

The limits of payback

• It ignores what happens after the payback date. A project that pays back in 3 years and then stops can look better than one that pays back in 4 years and keeps earning for 20.
• The simple version ignores the time value of money, which the discounted version fixes.
• It doesn't measure profitability. Use it alongside NPV or IRR; see How to Calculate NPV.

Payback is still useful as a quick risk screen and for projects where getting your cash back quickly matters most.

How to use the Payback Period Calculator

1. Open the Payback Period Calculator.
2. Enter the initial investment and the yearly cash flow.
3. Enter how fast the cash flow grows each year and the project life.
4. Enter a discount rate, and tick the discounting option to show the discounted figures in the charts and table.
5. Read the results: the simple and discounted payback periods, the year each is reached, the total cash inflow and the net return with ROI, with charts of the investment recovery and a year-by-year table.

Frequently asked questions

How do you calculate the payback period?

Divide the initial investment by the yearly cash flow. $100,000 ÷ $25,000 a year = 4 years.

What is the difference between payback and discounted payback?

The discounted payback converts future cash flows to today's dollars first, so it's longer. At 10%, the example's 4-year payback becomes 5 years 4 months.

What is a good payback period?

It depends on the investment and its life. Many businesses look for a payback well within the asset's useful life, often 2 to 5 years for equipment and marketing, but there's no universal rule.