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Payback Period Calculator

The calculator will show the payback period, discounted payback period, and net cash flows for the initial investment over a specified number of years.

Initial Investment

Irregular Cash Flow Each Year

Initial Investment

Fixed Cash Flow:

Discount Rate:

/ year

Discount Rate:

% / year

Number of Years:

Cash Flow:

Irregular Cash Flow Each Year

Fixed Cash Flow:

Cash Flow:

Discount Rate

in the first 1

in the first 2

in the first 3

in the first 4

in the first 5

in the first 6

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Payback Period Calculator

The payback period calculator helps estimate the time required to recover an investment. It calculates cumulative cash flow, discounted cash flow, and yearly cash flows, assisting investors in comparing projects and identifying which recovers the investment fastest.

What is the Simple Payback Period?

The simple payback period is the time it takes to recover an investment without considering the time value of money. It allows investors to compare opportunities and select projects with the shortest payback period.

Formula:

$$ PP = \frac{I}{C} $$

PP = Payback Period
I = Total Investment
C = Annual Cash Flow

Example:

Investment = $20,000, Annual Cash Flow = $500

$$ PP = \frac{20000}{500} = 40 \text{ years} $$

What is the Discounted Payback Period?

The discounted payback period accounts for the time value of money by discounting future cash flows. It calculates how many years it takes to recover the initial investment in present-value terms.

Formula:

$$ DPP = -\frac{\ln \left(1 - \text{Investment Amount} \times \frac{\text{Rate}}{\text{Cash Flow per Year}} \right)}{\ln (1 + \text{Rate})} $$

Example:

Investment = $100,000, Annual Cash Flow = $2,000, Discount Rate = 10%

$$ DPP = -\frac{\ln \left(1 - 100000 \times \frac{0.1}{2000}\right)}{\ln(1.1)} $$

$$ DPP \approx 14.52 \text{ years} $$

What is Cash Flow?

Cash flow is the movement of money into or out of a business. Positive cash flow indicates growth, while negative cash flow signals a decline in resources.

Discounted payback period calculators handle:

Fixed cash flow
Irregular cash flow

Fixed Cash Flow:

Cash flow remains constant over time. Use:

$$ PP = \frac{I}{C} $$

Irregular Cash Flow:

Cash inflows vary over time. Use:

$$ PP = A + \frac{B}{C} $$

A = Last period before full recovery
B = Cumulative net cash flow at end of period A
C = Cash inflow in the next period

Example:

Investment = $30M, Annual Cash Flows = $3M, $4M, $5M, $6M, $7M over 5 years

Year	Annual Cash Flow (M)	Cumulative Cash Flow (M)
0	30	30
1	3	27
2	4	23
3	5	18
4	6	12
5	7	5

$$ PP = 3 + \frac{18}{6} = 6 \text{ years} $$

What is Discounted Cash Flow (DCF)?

DCF evaluates an investment’s value by discounting future cash flows:

$$ DCF = \frac{CF}{(1+r)^1} + \frac{CF}{(1+r)^2} + ... + \frac{CF}{(1+r)^n} $$

CF = Cash Flow
r = Discount Rate
n = Number of Periods

Net Discounted Cash Flow:

Difference between discounted cash inflows and outflows.

What is Net Cash Flow?

Net Cash Flow = Total Cash Inflows – Total Cash Outflows

How to Use the Payback Period Calculator?

Fixed Cash Flow:

Enter initial investment
Enter annual cash flow
Select cash flow increase/decrease and percentage
Enter number of years and interest rate

Outputs: Payback period, discounted payback period, cash flow, net cash flow, DCF, net discounted cash flow.

Irregular Cash Flow:

Same inputs as fixed cash flow
Add annual cash flows for each year

Outputs are similar; extra options allow adding years or adjusting discount rates.

Step-By-Step Payback Period Calculation

Averaging Method:

Divide expected annual cash inflows by the initial investment:

$$ PBP = \frac{Total Expenditure}{Net Cash Flow per Year} $$

Subtraction Method:

Subtract annual cash inflows from the initial investment until cumulative cash equals the investment.

Example:

Investment = $500,000, Annual Cash Flow = $250,000, Maintenance = $5,000/year

$$ Net Cash Flow = 250,000 - 5,000 = 245,000 $$

$$ PBP = \frac{500,000}{245,000} \approx 2.04 \text{ years} $$

Uneven inflows example: PBP = 4 years using subtraction method.

FAQs

What is a reasonable payback period?

Shorter payback periods are preferable, as longer periods tie up capital and reduce investment flexibility. Reference

What is the ROI formula?

$$ ROI = \frac{Investment Gain}{Investment Base} $$

Do you include depreciation in payback period?

No, depreciation is ignored in payback period calculations.

Major criticisms of payback period?

It ignores the time value of money. Reference

End Note

Understanding both fixed and irregular cash flows is crucial before investing. This payback period calculator helps estimate payback durations and cash flows for informed decisions. Always consult a finance professional before finalizing investments.

References

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