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MasterMath

Payback Period Calculator

1,000 returning 400 a year is paid back in 2.5 periods. Discount those flows at 10% and it is never paid back at all — which is the more useful answer.

Currency and number format for

You get your money back in

—

You get your money back in—
Counting the discount—
Initial investment—
Total it generates—

How this was worked out

    The formula

    the period at which the accumulated flows stop being negative

    Where it comes from

    Payback counts how long it takes to get the original investment back. The plain version simply adds the flows; the discounted version adds their present values, which is slower and far more honest about what the wait costs.

    How to work it out by hand

    1. Start from the investment as a negative balance
    2. Add each period's flow to the running total
    3. Note the period where the total turns positive
    4. Interpolate within that period for a fractional answer

    What is worth knowing

    Payback is the crudest of the investment measures and the most used, because it answers the question people actually ask: when do I stop being exposed. Its two blind spots are worth naming. It ignores everything that happens after the payback point, so a project that pays back in two years and then dies beats one that pays back in three and runs for twenty. And the undiscounted version pretends money arriving in year three is worth as much as money today. The discounted column here is the corrective: when it says never, the project does not clear its own cost of capital.

    Frequently asked questions

    What is a good payback period?

    It depends entirely on the sector and the risk. It is a threshold set by policy, not a number derived from the maths.

    Why does the discounted version take longer?

    Because it counts each future flow at what it is worth today, which is less. If it never pays back discounted, the project does not clear the return you demanded.

    Should I decide on payback alone?

    No. It ignores everything after the payback point. Use it alongside NPV, which does not.

    What does 'never' mean here?

    That the accumulated flows never reach the investment. In the discounted column that is common and simply means the return is below the discount rate.