Payback Period Calculator
Calculate how long it takes to recover your investment. Compare simple and discounted payback periods for business investment decisions.
What is the payback period?
The payback period is the time it takes for an investment to generate enough cash flows to recover its initial cost. It's a simple measure of investment risk - shorter payback periods are generally preferred as they indicate faster recovery of invested capital.
How do I calculate the payback period?
Divide the initial investment by the annual cash flow. For example, a £100,000 investment generating £25,000 per year has a payback period of 4 years (£100,000 ÷ £25,000 = 4).
What is a good payback period?
This varies by industry and investment type. Generally, 2-5 years is considered acceptable for business investments. Capital-intensive industries may accept longer periods. Always compare to your company's required payback threshold.
What are the limitations of payback period?
Payback period ignores cash flows after the payback point, doesn't consider the time value of money, and doesn't measure profitability. Use alongside other metrics like NPV and IRR for comprehensive analysis.
What is discounted payback period?
Discounted payback period accounts for the time value of money by discounting future cash flows before calculating payback. This gives a more accurate picture as it recognises that £1 today is worth more than £1 in the future.
Investment Decision
Use payback period alongside NPV and IRR for comprehensive investment analysis.