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**Finance Calculators** ▶ Payback Period Calculator

An online payback period calculator allows you to calculate the both simple payback period and discounted payback period as well as estimates the time to recover the initial investment. Also, this discounted payback period calculator provides you the cumulative cash flow including discounted cash flow and cash flow of each year. You can calculate the results either from fixed cash flow or irregular cash flow each year.

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 manually, the formula of payback period, and certain terms related to the payback period.

Let’s begin with the basic definition of the payback period.

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.

For the calculation of a simple payback period following formula will be used,

PP= 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=$20000/$500

PP=40years

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The main benefit of the payback period is that if you want to invest money in the business then, the payback period helps you to tell which project has a minimum 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 basic disadvantage of the payback period is that it ignores the time value of money. Without the time value of money, it is impossible to determine which project/business in which you are going to invest worthwhile.
- The payback period does not evaluate the riskiness of the project.

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.

For the calculation of discounted payback period, the following formula will be used.

DPP=- ln(1-investment amount*rate/(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=-ln(1-100000*0.1/2000)/ln(1+0.1)

DPP=-ln(1-10000/2000)/ln(1.1)

DPP=-ln((2000-10000)/2000)/ln(1.1)

DPP=-ln〖(-4)〗/ln(1.1)

DPP=1.38/0.095

DPP=14.52years

The payback period is the measure of time for a task to earn back the original investment in real money, while the discounted payback period is the measure of time important to make back the initial investment in a task, and break an initial investment into different cash flows.

Both calculations, although similar but they did not return similar results because of discounting the cash flows. The payback period returns positive answers while the discounted payback period returns negative figures.

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 these 2 types of cash flows:

- Fixed cash flow
- Irregular 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.

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+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+18/6

PP=6years

The initial investment the investor makes. It will be used to determine the amount of money that takes in the investment.

There are two definitions of the discount rate in finance.

- When we operating the discounted cash flow analysis,discount rate is the part of calculations for the net present value(NPV).
- The discount rate is the interest rate on loans given to the banks.

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= CF/(1+r)^1 +CF/(1+r)^2 +CF/(1+r)^3 +⋯+CF/(1+r)^n

Where,

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

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

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

The discounted payback period calculator helps you to calculate the following:

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

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

Swipe on!

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.

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 for the payback period is very handy.

**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.

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

This method states that,

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

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:

Read on!

**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,

Payback period=500000/245000

Payback period = 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 |

Now,

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 payback period calculated by the subtraction method is 4years.

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

Return On Investment (ROI) formula is,

ROI=(Investment Gain)/(Investment Base)

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.

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.

In calculating the payback period, depreciation has been ignored.

The three most basic terms for the selection of projects are payback Period(PB), Internal Rate of Return (IRR), and Net Present Value(NPV).

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

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

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 and discounted payback period. Before taking any decision with this payback calculator, consult with your finance manager.

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

From the source of freshbooks: What Is a Payback 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