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# Payback Period Calculator

The free payback period calculator helps you to estimate the discounted payback periods. Also, you can determine the return rate and schedules of investments by using this calculator.

Fixed Cash Flow

Initial Investment ?

$Cash Flow ? / year ? % / year Number of Years ? % Discount Rate ? ADVERTISEMENT Irregular Cash Flow Each Year Initial Investment ?$
%

Discount Rate ?

Cash Flow

$Year 1$

Year 2

$Year 3$

Year 4

$Year 5$

Year 6

Table of Content
 1 What is The Simple Payback Period? 2 The Formula For Payback Period: 3 What is The Discounted Payback Period? 4 Discounted payback period formula: 5 What Is Cash Flow? 6 What is Discounted cash flow(DCF)? 7 What is Net discounted cash flow? 8 What is Net cash flow? 9 How to calculate net cash flow? 10 How to Calculate Payback Period (Step By Step)? 11 What is a reasonable payback period? 12 What is ROI formula? 13 What is payback rule? 14 What is the difference between ROI and payback period? 15 Do you include Depreciation in payback period? 16 What is the major criticisms of payback period? 17 Does excel have a payback function?
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The online payback period calculator lets you calculate the payback periods with discounts, estimate your average returns and schedules of investments. Also, this discounted payback period calculator estimates the cumulative cash flow discounted cash flow and cash flow of each year. Quit worrying as you can calculate the results from fixed or irregular cash flow each year by using this calculator.

Give a brief read to this article for a better understanding of how to calculate the payback period with this payback calculator and step by step, payback period formula, and certain helpful terms.

## What is The Simple Payback Period?

According to the basic definition, the time period from present to when an investment will be completely paid referred to as the payback time period. This analysis helps the investors to compare investment chances and decide which project has the shortest payback period.

If investors going to invest in some projects, then they must know about the payback period. So, try this payback period calculator to determine how long the project recovers the investment.

### The Formula For Payback Period: –

The formula is given below:

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

Where,

• PP = Payback period
• I = Total investment
• C = Cash flow, the money you earn.

For example:

You are going to invest $20000 in purchasing a house. Then, you are going to rent it on for$500.What’s the time of payback?

Here,

I = $20000 C =$500

So,

$$PP = \frac{20000}{500}$$

$$PP=40years$$

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## What is The Discounted Payback Period?

It gives the number of years it takes to earn back the initial investment from undertaking the expenditures like discounting the cash flows and admitting the time value of money.

The online discounted payback period calculator performs the calculations based on the initial investment, discount rate, and the number of years.

Key-points:

• In the time value of money discounted payback period is more accurate than a simple payback period.
• The shorter the discount period, the sooner a project generates cash flows to cover the initial cost.

### Discounted payback period formula: –

The formula is mentioned below:

$$DPP= -\frac{ln(1-\text{investment amount}*\frac{rate}{\text{cash flow per year}})}{ln(1+rate)}$$

For example:

If an initial investment of $100000 and annual payback of$2000, discount rate is 10%, then how to calculate discounted payback period?

Here,

$$DPP= -\frac{ln(1-100000*\frac{0.1}{2000})}{ln(1+0.1)}$$

$$DPP= -\frac{ln(1-\frac{10000}{2000})}{ln(1.1)}$$

$$DPP= -\frac{ln\frac{(2000-10000)}{2000})}{ln(1.1)}$$

$$DPP= -\frac{ln(-4)}{ln(1.1)}$$

$$DPP = \frac{1.38}{0.095}$$

$$DPP=14.52 years$$

## What Is Cash Flow?

Cash flow is the inflow or outflow of the cash of an organization. If an investor’s assets are increasing then paying out the assets indicated as positive cash flow. While decreases in assets mean negative cash flow. You can easily figure out the cash flow yearly by using our payback calculator.

Discounted payback period calculator performs the calculations of these 2 types of cash flows:

1. Fixed cash flow
2. Irregular cash flow

### Fixed Cash Flow: –

If the cash flow in such a way that it remains constant over time, then the cash flow will be fixed cash flow.
The formula for calculation of payback period (fixed cash flow) mentioned-earlier in the content.

### Irregular Cash Flow: –

In this, the amount of net cash flow varies over time and termed as uneven cash flow or irregular cash flow.

Formula for the irregular cash flow: –

When we need to calculate the cumulative net cash flow for the irregular cash flow, use the following formula.

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

Where,

A = Last period number

B = Value of cumulative net cash at end of period A.

C = Cash inflow of the following period.

For example:

A firm invested $30million and hopes to generate$3million cash flow in 1st year,$4 million in 2nd year$5million in 3rd year,$6million in 4th year, and$7million in 5th year. Calculate the payback value of the project?

 Year Cash flow Annual Cash flow Commulative 0 30 30 1 3 27 2 4 23 3 5 18 4 6 12 5 7 5

Here,

A=3

B=18

C=6

So applying the formula,

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

$$PP =6 years$$

## What is Discounted cash flow(DCF)?

Discounted Cash Flow is a method to evaluate the value of an investment based on future cash flow. It determines the value of an investment based on how much money will generate by this investment. This applies to the investors and entrepreneurs who want to make changes in their businesses. Our discounted payback period calculator calculates the discount cash flow accurately and provides you with the complete cash flow in the form of table.

The formula for the calculations of discounted cash flow is,

$$DCF = \frac{CF}{(1+r)^1}+\frac{CF}{(1+r)^2}+\frac{CF}{(1+r)^3}+\text {. . .}+\frac{CF}{(1+r)^n}$$

Where,

• CF = Cash flow
• r = Interest rate
• n = period number

### What is Net discounted cash flow?

The amount obtains after taking the difference from the discounted cash flow is the net discounted cash flow.

## What is Net cash flow?

After taking a difference from the yearly cash flow the amount of money obtained is termed as net cash flow.

### How to calculate net cash flow?

To calculate the net cash flow, the following formula is used:

Net cash flow = Total cash inflows – total cash outflows

Also, our calculator performs calculations of net cash flow according to this formula.

## How to Calculate The Payback Period With This Calculator?

Now, for calculating the payback period just follow the given steps.

Swipe on!

#### Calculations for the Fixed cash flow:

If you have a fixed cash flow then entered the values in the given fields of the fixed cash flow portion.

Inputs:

• First of all, enter the total initial investment in the field.
• Then, put the cash flow per year in the designated field.
• Then, select the cash flow increases or decreases from the dropdown menu of this
• Next, enter how much percentage of cash flow increase/decrease.
• Very next, plug in the number of years.
• Lastly, put the interest rate (%) in the given field.

Outputs:

When you entered in all the above fields.This online free tool shows you:

• Payback period.
• Discounted payback period.
• Cash flow.
• Net cash flow.
• Discounted cash flow.
• Net discounted cash flow.

#### Calculations for the irregular cash flow:

If you want to pay different payments then our payback calculator assists you to calculate the payback period of irregular cash flow.

Inputs:

• Well, the inputs for irregular cash flow are the same as discussed above.
• But there is an extra option to enter the amount you want to pay in different years.

Outputs:

The outputs of irregular cash flow are the same as in the fixed cash flow. So, if you want to calculate the payback period for the irregular cash flow then this calculator works best.

Note:

• If you want to pay payments according to your desired years then there is also an option of “add more years”.
• If your selected years are less to repay the total investment then this calculator tells you that this tenure is less as well as how much average payback per year to complete the payment in your selected years.
• Also if the discount rate is low to repay the investment in the entered tenure then the payback calculator notify that this interest rate is low as well as how much money repaid according to the given interest rate and years.

## How to Calculate Payback Period (Step By Step)?

For the calculations for cash inflows and cash outflows averaging method and subtraction method is used respectively.

### Averaging Method:

This method states that,

“Divide the expected cash inflows annually to expected initial expenditures”.

### Subtraction Method:

This method states that,

“Subtract each cash inflow annually from the initial cash outflow till payback period completes ”

Well, for a better understanding we explain it through an example:

Example:

XYZ company spends $500000 on buying machinery. In five years the maintenance cost of machinery is$5000. And make $250000 from customers. What is the payback period of these values? By averaging method: Total expenditure =$500000

Net cash flow annually = $250000 –$5000

= $245000 So, $$PBP = \frac{500000}{245000}$$ $$Payback Period (PBP) = 2.04 years$$ By subtraction method: Consider the$1000000 is total positive cash flow spread as follows,

 Year 1 $0 Year 2$125000 Year 3 $250000 Year 4$500000 Year 5 $1000000 We should subtract the money inflows from$500000 initial expenditures for four years before completing the payback period. Since incomes delayed to a very large extent. So, the PBP can be calculated by the subtraction method is 4years.

### What is a reasonable payback period?

The shortest payback period considered the most reasonable. The reason is that the longer the money is tied up, there are fewer chances to invest it anywhere else.

### What is ROI formula?

Return On Investment (ROI) formula is,

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

### What is payback rule?

The payback rule is stated as” The time taken to payback the investments”.

The repayment of investment in the form of cash flows over the life of assets.

### What is the difference between ROI and payback period?

ROI is the amount of money gain by doing action divided by the cost of the action. Also. it doesn’t describe the risk of investment. While the payback period is the time taken to equalize the total investment and total cost.

### Do you include Depreciation in payback period?

No, while calculation, the depreciation has been ignored.

### What is the major criticisms of payback period?

The major disapproval that it ignores the “time value of money”.

### Does excel have a payback function?

Excel does not have a function for calculating the payback period.

## End-note:

When you’re going for investment in a project, it is crucial to know about the fixed cash flow and irregular cash flow. Simply, consider this free payback period calculator helps to get the estimated values of the payback period for regular and irregular cash flow. Before taking any decision with this payback calculator, consult with your finance manager.

## References:

From the source of Wikipedia: Payback period, purpose and much more.

From the source of freshbooks: What Is a Payback of Period and How Time Affects Investment Decisions

From the authorized source of Shopify: What is Discounted Cash Flow (DCF) & Equation for calculating DCF

The businessknowhow provided with: Cash flow basics and 15 Ways to Fix Cash Flow Problems