Payback Period Calculator: calculate payback period for your business. Formula, benchmarks, and practical tips included.
Simple payback = Initial investment ÷ Annual cash inflow (for constant flows). For variable flows: cumulate annual cash inflows until the running total equals the investment. For partial years: Payback = Year before recovery + (Remaining amount ÷ Cash flow in recovery year).
Discounted payback: same cumulative process but each year's cash flow is first discounted: Discounted CF_y = CF_y ÷ (1 + r)^y. Then cumulate until the running PV total equals the investment. The discounted payback is always longer than the simple payback because discounting reduces the value of future cash flows.
Worked example: £100,000 investment, constant £35,000 annual inflow, 10% discount rate. Simple payback = 100,000 ÷ 35,000 = 2.86 years (2 years 10 months). Year 1 discounted CF = 35,000 ÷ 1.10 = £31,818. Year 2 = £28,926. Year 3 = £26,296. After 3 years: PV = £86,040. Remaining = £13,960. Year 4 DCF = £23,905. Discounted payback ≈ 3 years + (13,960/23,905) = 3.58 years.