How do you calculate the payback period?
The payback period is the time a project takes to hand back the cash it cost. Add the cash flows year by year, starting from the negative year 0 investment, and find the point where that running total, the cumulative cash flow, reaches zero. When every year brings the same amount it is simply payback = initial investment / annual cash flow.
Uneven cash flows need a cumulative table. Here is the default project, with $100,000 invested and $30,000, $40,000, $50,000 and $20,000 coming back:
| Year | Cash flow | Cumulative |
|---|---|---|
| 0 | -$100,000 | -$100,000 |
| 1 | $30,000 | -$70,000 |
| 2 | $40,000 | -$30,000 |
| 3 | $50,000 | $20,000 |
| 4 | $20,000 | $40,000 |
The running total turns positive during year 3. At the end of year 2, $30,000 is still outstanding, and year 3 brings $50,000. If that cash arrives evenly through the year, payback = 2 + 30,000 / 50,000 = 2.6 years, which is about 2 years 7 months.
How do you calculate discounted payback?
Discounted payback runs the same count on present values, so it tells you how long the project takes to repay its cost in today's money. Each cash flow is multiplied by its discount factor before it is added up. At 10%, with factors to three decimals as a written answer reads them from a table:
| Year | Cash flow | Factor at 10% | Discounted | Cumulative |
|---|---|---|---|---|
| 0 | -$100,000 | 1.000 | -$100,000 | -$100,000 |
| 1 | $30,000 | 0.909 | $27,270 | -$72,730 |
| 2 | $40,000 | 0.826 | $33,040 | -$39,690 |
| 3 | $50,000 | 0.751 | $37,550 | -$2,140 |
| 4 | $20,000 | 0.683 | $13,660 | $11,520 |
Discounted payback = 3 + 2,140 / 13,660 = 3.16 years. With unrounded factors the shortfall at the end of year 3 is $2,103.68 and year 4 is worth $13,660.27 today, so the exact figure is 3.15 years, about 3 years 2 months; that is the figure in the second result tile. The final cumulative figure, $11,520, is also the project's NPV from the same table, which is why the two are so often worked out together.
How do you calculate payback when the cash flow is the same every year?
Divide the outlay by the yearly cash flow. An example in pounds: equipment costing £45,000 that saves £12,000 a year pays back in 45,000 / 12,000 = 3.75 years, or 3 years 9 months.
The discounted version has no one-line ratio, because each year's £12,000 is worth less than the one before. At 8% the present values for years 1 to 5 are £11,111.11, £10,288.07, £9,525.99, £8,820.36 and £8,167.00, which leaves £5,254.48 still unrecovered at the end of year 4. Discounted payback is therefore 4 + 5,254.48 / 8,167.00 = 4.64 years. Choose Same each year above to see the full table for any outlay, amount and rate.
Payback, IRR and NPV: what does payback miss?
Payback measures speed, not value. It ignores every cash flow after the payback point, and simple payback ignores the time value of money too. Two projects in UAE dirhams show the problem. Each costs AED 100,000 and returns AED 50,000 in each of its first two years:
| Project | Year 3 cash flow | Simple payback | Discounted at 10% | NPV at 10% |
|---|---|---|---|---|
| X | AED 0 | 2 years | not paid back | -AED 13,223 |
| Y | AED 60,000 | 2 years | 2.29 years | AED 31,856 |
Simple payback scores them as equal. Discounted payback separates them, and NPV shows how far apart they really are. That is why payback tends to serve as a first screen or a liquidity check next to NPV or IRR rather than as the deciding test. The default project pays back in 2.6 years and has an IRR of 15.32%; the IRR calculator works out that second figure from the same rows.
How do you calculate the payback period in Excel?
Excel has no payback function, so build the cumulative column yourself. Put years 0 to 4 in A2:A6 and the cash flows in B2:B6, enter =SUM($B$2:B2) in C2 and fill it down to C6. The count of negative cumulative values, less one for year 0, is the number of full years before recovery, and the rest is the in-year fraction:
=COUNTIF(C2:C6,"<0")-1-INDEX(C2:C6,COUNTIF(C2:C6,"<0"))/INDEX(B2:B6,COUNTIF(C2:C6,"<0")+1)
For the default project it returns 2.6. The formula assumes a conventional project whose running total stays positive once it turns. For discounted payback, add a column D with =B2/(1+10%)^A2, a running total of it in column E, and point the same formula at columns E and D; it returns 3.154. Google Sheets accepts the same formulas.
How do businesses use a target payback period?
A business can set a maximum payback, such as three years, and set aside projects that take longer. Enter yours in the calculator and the fourth tile reports whether simple payback, discounted payback, both or neither come in within it. On the default inputs with a 3-year target, the simple payback of 2.6 years passes and the discounted payback of 3.15 years does not, which shows how much the choice of measure matters.
A target payback makes most sense where cash is tight, the technology could date quickly, or forecasts beyond a few years are close to guesswork. It is a rule of thumb about risk and liquidity, not a measure of profit, and a short target can turn away a project whose large NPV arrives later.
What if the investment is never paid back?
If the cumulative total is still negative in the last year entered, the calculator says so plainly and shows how much is still outstanding, rather than inventing a figure. An outlay of $100,000 that returns $10,000 a year for two years, for instance, leaves $80,000 unrecovered. Often the answer is simply to add the later years the project really has.
Discounted payback can fail where simple payback succeeds. Project X above gets its cash back in 2 years but never in today's money at 10%, because its NPV is negative. And if a later outflow, such as a refurbishment, pushes the cumulative total back below zero after payback, the calculator reports the first recovery and adds a note, so read that figure together with the table.
How do the inputs move the payback period?
Discount rate. Simple payback ignores it. Discounted payback lengthens as the rate rises: for the default project it is 2.6 years at 0%, 3.15 years at 10% and 3.94 years at 15%, and at 20% the outlay is not recovered within the four years at all. Size and timing of the cash flows. Bigger or earlier inflows shorten payback; anything after the payback point makes no difference to it. The outlay. A larger investment needs more years of cash to cover it, so payback grows with it, in proportion when the yearly cash flow is level.
Common payback mistakes
- Using profit instead of cash. Payback counts cash flows, so depreciation is not deducted; only tax and real spending are.
- Leaving out cash spent at the start. Working capital and set-up costs belong in year 0 with the main outlay.
- Rounding to whole years too early. Interpolate inside the recovery year, then convert the fraction to months by multiplying by 12.
- Assuming even cash within the year when it is seasonal. The interpolation is an approximation, and lumpy cash can arrive sooner or later.
- Comparing different measures. Set simple payback against simple payback and discounted against discounted.
- Treating payback as the whole decision. It says nothing about cash after the payback point.
What the payback calculator leaves out, and a glossary
The calculator works on the yearly cash flows you enter and assumes cash arrives evenly within each year for the interpolation. It does not add tax, inflation or the risk that later cash flows will not come, and its target check is only as useful as the target you set. To see the value the same cash flows add, use the NPV calculator.
Payback period: the time until cumulative cash flow reaches zero. Discounted payback: the same, using present values. Cumulative cash flow: the running total of cash flows from year 0. Discount factor: 1 / (1 + r)^t. Target payback: the longest payback a business will accept. Liquidity: how quickly cash tied up in a project comes back.
Frequently asked questions
What is the formula for the payback period?
With equal yearly cash flows, payback = initial investment / annual cash flow, so 45,000 / 12,000 gives 3.75 years. With uneven cash flows, payback = years before full recovery + amount still unrecovered at the start of the recovery year / cash flow during that year.
How do you calculate payback period with uneven cash flows?
Build a cumulative total year by year from the negative investment. Find the year in which it turns positive, then divide the amount still owed at the start of that year by the year's cash flow. For the default project that is 2 + 30,000 / 50,000 = 2.6 years.
What is the difference between payback and discounted payback?
Simple payback adds the cash flows as they are. Discounted payback first converts each one into today's money at a chosen rate, so it is longer whenever the rate is above zero. The default project takes 2.6 years simple and 3.15 years discounted at 10%.
How do you turn a payback period into years and months?
Keep the whole years and multiply the decimal part by 12. A payback of 2.6 years is 2 years plus 0.6 x 12 = 7.2 months, so about 2 years 7 months. The calculator shows both forms.
Is a shorter payback period always better?
Not on its own. A shorter payback means the money comes back sooner, which lowers risk and helps cash flow, but it ignores everything after that point. A project with a longer payback can still add more value, which is why NPV is read alongside it.
What does it mean if the payback period cannot be calculated?
The cash flows entered never repay the investment, so the cumulative total stays below zero. The calculator shows the amount still unrecovered. Check that later years are included and that the investment is entered as a negative year 0 figure.
How do I calculate payback period in Excel?
Add a cumulative column with =SUM($B$2:B2), then count the negative cumulative values to find the full years and divide the remaining shortfall by the next year's cash flow. There is no built-in payback function.
Why is discounted payback longer than simple payback?
Discounting shrinks every future cash flow, more so the later it arrives, so it takes longer for the discounted amounts to cover the outlay. At a 0% rate the two are the same; the higher the rate, the bigger the gap.
What is the difference between payback and ROI?
Payback measures time: how long until the cash invested comes back. Return on investment measures size: net gain as a share of the cost. The default project pays back in 2.6 years and returns $40,000 on $100,000, or 40% over four years before discounting.
Can I calculate payback in months?
Yes. Enter each month as a row in the year-by-year list and read the answer as a number of months; the rate for discounted payback must then be a monthly rate too. The table and chart keep the label year, but the arithmetic is the same.
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Last reviewed 13 November 2026 by the NIFM Academy editorial team. Next review by 13 November 2027.
- ACCA, Financial Management (FM) formulae sheet and maths tables (accaglobal.com, file S23_FM_Formulae.pdf, the version linked from the FM exam formulae and maths tables page), present value table (1 + r)^-n with factors printed to 3 decimal places for 1% to 20% and 1 to 15 periods, used for the 10% factors in the discounted payback table. Checked 14 November 2026.