Payback period calculator
The payback period is how long an investment takes to bring back what it cost, counted in cash. Enter the cost and the net cash it brings in each year to see the payback in years and months and what it returns over its working life. The second calculator handles cash that changes from year to year.
Payback with the same cash each year
No answer means the yearly cash isn't above zero, so the cost is never repaid.
Payback when the cash varies by year
No answer means five years of cash don't cover the cost.
Payback is the quickest test of a spending decision, and the crudest. It tells you when you'll have your money back, not whether the investment is worth making, so use it alongside the ROI calculator.
How to calculate the payback period
If the investment brings in roughly the same cash each year, divide its cost by that yearly figure:
Payback period (years) = initial investment ÷ annual net cash inflow
To turn the decimal part into months, multiply it by 12. A payback of 2.67 years is 2 years plus 0.67 × 12 = 8 months.
Use cash, not profit. Depreciation isn't money leaving the bank, so don't deduct it; do deduct the running costs the investment brings with it, such as servicing, licences, energy and insurance. When the cash varies from year to year, add it up year by year until the running total reaches the cost, then work out how far into the next year the last part comes back. The second calculator does this for up to five years.
Worked example
A fictional 25-person joinery workshop is pricing a CNC router at £48,000, including installation and operator training. It would bring £14,000 a year of outsourced machining back in-house and free up time for about £6,000 a year of extra work, after materials. Servicing and tooling add £2,000 a year. Net cash in: £14,000 + £6,000 − £2,000 = £18,000 a year.
£48,000 ÷ £18,000 = 2.67 years, or 2 years 8 months. Over the five years the workshop expects to use it, the router returns £90,000, which is £42,000 more than it cost.
The workshop is also weighing a £60,000 production-planning system whose savings build slowly: £12,000 in year 1, then £18,000, £22,000, £22,000 and £20,000. After three years £52,000 has come back. The remaining £8,000 comes out of year 4's £22,000, so payback is 3 + 8 ÷ 22 = 3.36 years, about 3 years 4 months. Both sets of figures are the calculators' starting values.
Discounted payback
Simple payback treats £1 received in year five as worth the same as £1 today. Discounted payback first shrinks each year's cash by a discount rate, usually what borrowing costs you or what the money could earn elsewhere, then counts the years. For the router at 8%:
| Year | Cash in | Discounted at 8% | Running total |
|---|---|---|---|
| 1 | 18,000 | 16,667 | 16,667 |
| 2 | 18,000 | 15,432 | 32,099 |
| 3 | 18,000 | 14,289 | 46,388 |
| 4 | 18,000 | 13,231 | 59,618 |
After year 3, £1,612 is still to recover and year 4 adds £13,231, so the discounted payback is 3 + 1,612 ÷ 13,231 = 3.12 years: about five and a half months longer than the simple answer. Each discounted figure is the year's cash divided by 1.08 raised to the power of the year number.
How to read the answer
- Against the asset's life. If the payback is longer than the time the asset will last, it never pays for itself.
- Against your own limit. If you set a maximum payback for routine spending, base it on how long the business can wait for its money and how far ahead you trust your forecasts.
- Alongside the return. Two projects can both pay back in two years while one keeps earning for ten and the other stops at three. Payback can't see the difference; return on investment and discounted measures can.
- Against your cash. A quick payback still needs the money up front. Check the timing in your cash flow forecast before you commit.
Common mistakes
- Using profit instead of cash, so depreciation makes the payback look longer than it is.
- Leaving out running costs such as servicing, software subscriptions and extra energy.
- Counting time saved as cash. Freed-up hours only pay back if they're sold to customers or a cost actually goes.
- Assuming a full first year. If output will dip while people learn the new kit, put a smaller year 1 into the second calculator.
- Forgetting the edges: removing the old machine at the start, and any resale value at the end.
- Ranking projects on payback alone, which favours small, quick wins over bigger investments that earn for longer.
Frequently asked questions
What is a good payback period?
There's no standard figure. A good payback is comfortably shorter than the asset's useful life and fits how long your business can wait for its cash. Compare it with projects you've done before rather than with a rule of thumb.
What's the difference between payback period and ROI?
Payback measures time: how long until the cost comes back. ROI measures size: the gain as a percentage of the cost. A project can pay back quickly and still have a poor ROI if it stops earning soon afterwards.
How do you work out payback with uneven cash flows?
Add the cash year by year until the running total reaches the cost. Count the whole years before that point, then divide what's left to recover by the next year's cash to get the part-year.