How this calculator works
The payback period counts the years until the cumulative cash flow repays the initial investment. With a level cash flow it is simply the investment divided by the yearly amount. With uneven flows the calculator adds the years one at a time and interpolates within the year when the investment is repaid, so a shortfall of $20,000 in a year that produces $50,000 adds 0.4 of a year. The discounted version first reduces each year's cash flow by the discount rate, which reflects the fact that money received later is worth less today, and then repeats the count on the discounted amounts. Discounted payback is therefore always at least as long as simple payback when the discount rate is positive.
Formula
Simple payback with level flows = initial investment / annual cash flow. With uneven flows, payback = years completed + (unrecovered cost / cash flow in the next year). Present value of year t = cash flow_t / (1 + r)^t. Discounted payback repeats the same count on present values.
Worked example
An investment of $100,000 with cash flows of $30,000, $40,000, $50,000, $60,000 and $70,000 repays after two full years plus ($100,000 - $70,000) / $50,000 = 2.6 years. At a 10% discount rate the present values are $27,272.73, $33,057.85, $37,565.74 and $40,980.81; the cumulative total reaches $97,896.32 after three years, so discounted payback is 3 + ($100,000 - $97,896.32) / $40,980.81 = 3.051 years.
Advertisement
Frequently asked questions
Why is the discounted payback longer?
Discounting shrinks each future cash flow, so more of them are needed to recover the same investment. The gap widens as the discount rate rises or as the cash flows arrive later.
What happens when the cash flows never repay the investment?
The payback output is left out. That is the honest answer: within the years supplied, the cumulative flow never reaches the initial cost. Add more years to the list if the project is expected to recover later.
Is a shorter payback always better?
It reduces exposure to distant, uncertain cash flows, but it ignores everything after the payback date. A three-year payback that then earns nothing can be worse than a five-year payback followed by a decade of strong returns. Use payback alongside net present value or the profitability index.