What is the payback period?

The payback period is the number of years it takes for the cumulative cash inflows from a project to equal the initial outlay. A project with a £100,000 investment that generates £25,000 per year has a simple payback of 4 years. It is one of the oldest and most intuitive capital-budgeting metrics.

What is the difference between simple and discounted payback?

The simple payback adds up undiscounted cash flows until the running total hits zero. The discounted payback does the same but first reduces each cash flow by 1/(1+r)^t, where r is your required rate of return and t is the year. Because money today is worth more than money tomorrow, the discounted payback is always equal to or longer than the simple payback — it gives a more conservative and realistic answer.

How is the discounted payback period calculated?

Each year's cash flow is divided by (1 + r)^t to get its present value. The calculator accumulates these present values, starting from minus the initial investment, until the running total crosses zero. The fractional year is found by linear interpolation: fraction = |previous cumulative balance| / discounted cash flow in the crossing year. The result is expressed in years and months.

What is a good payback period?

It depends on the industry and risk profile. Consumer electronics projects often need payback under 2 years because technology changes fast. Industrial equipment and infrastructure projects may accept 5-10 years. As a rule of thumb, a payback period shorter than the asset''s useful life is a minimum requirement; anything in the bottom third of that life is considered good. Always compare against your organisation''s stated hurdle and against comparable projects.

What is NPV and why does it matter alongside payback?

NPV (Net Present Value) is the sum of all discounted cash flows minus the initial investment. A positive NPV means the project generates more value than your required rate of return; a negative NPV destroys value. The payback period tells you *when* you recover your money but ignores cash flows after the payback point entirely — NPV captures the full picture. Use both: payback for liquidity risk, NPV for value creation.

What is IRR and how is it found?

IRR (Internal Rate of Return) is the discount rate that makes NPV exactly zero. It represents the annualised return the project earns on the invested capital. This calculator finds IRR numerically using the bisection method — repeatedly halving the search interval between a rate that gives positive NPV and one that gives negative NPV until the result converges to within 0.000001%. If cash flows never change sign, IRR may not exist and the calculator shows "n/a".

Payback Period Calculator

The payback period is the single most-used screening metric in capital budgeting: it answers the question “how long until I get my money back?” Both the simple payback period and the more rigorous discounted payback period are supported here, alongside the full NPV and IRR — the two benchmarks every finance team checks alongside payback.

All calculations run entirely in your browser. Nothing is uploaded or stored.

How it works

Simple payback period

The simplest form assumes a single upfront outlay at time zero and a series of cash inflows in subsequent years. The calculator accumulates the cash flows — starting from negative initial investment — and reports the year (and interpolated month) when the running total first crosses zero.

For perfectly even annual flows the closed-form answer is:

Payback = Initial Investment / Annual Cash Flow

For uneven flows the crossing is found by linear interpolation:

Fractional year = |balance at start of crossing year| / cash flow in crossing year

Discounted payback period

This is the superior metric when you want to account for the time value of money. Each cash flow CF(t) is discounted before being added to the cumulative balance:

Discounted CF = CF(t) / (1 + r)^t

where r is your hurdle rate (or WACC) and t is the number of years from now. The crossing point is found by the same interpolation as above, but applied to the discounted series. Because discounting shrinks each inflow, the discounted payback is always longer than — or equal to — the simple payback.

NPV

NPV = sum of [ CF(t) / (1 + r)^t ] for t = 1 to n minus Initial Investment

A positive NPV confirms the project earns more than the hurdle rate over its life. The payback period alone cannot tell you this — a project can break even quickly yet destroy value if cash flows collapse after the payback point.

IRR

The IRR is the value of r that makes NPV = 0. There is no closed-form solution for most cash-flow schedules, so the calculator uses bisection: it searches the interval (-99.99%, 10 000%) and halves it 200 times until the NPV at the midpoint is within 0.000001% of zero. For most well-behaved investment profiles this converges in under a millisecond. If the sign of cumulative cash flow never changes (the project never recovers), no real IRR exists and the calculator shows “n/a”.

Worked example

A logistics company is evaluating a warehouse automation system costing £100,000 upfront. Management expects cash savings (net of operating costs) of:

Year	Cash flow
1	£25,000
2	£30,000
3	£35,000
4	£40,000
5	£45,000

The company’s hurdle rate is 10%.

Simple payback: After year 3 the cumulative undiscounted total is £25k + £30k + £35k = £90,000 — still £10,000 short. In year 4 another £40,000 comes in, so:

3 + (10,000 / 40,000) = 3 years 3 months

Discounted payback: Discounting each flow at 10%:

Year	CF	Factor	Discounted CF	Cumulative disc.
0	(100,000)	1.0000	(100,000)	(100,000)
1	25,000	0.9091	22,727	(77,273)
2	30,000	0.8264	24,793	(52,480)
3	35,000	0.7513	26,296	(26,184)
4	40,000	0.6830	27,321	1,137

Discounted payback: 3 + (26,184 / 27,321) = 3 years 11 months

NPV (all 5 years): approximately +£29,300 — the project creates value.

IRR: approximately 22.8% — well above the 10% hurdle, a strong result.

Enter these numbers in the calculator above to verify each figure instantly.