Payback Period Calculator Calculate simple and discounted payback periods for capital projects — with uneven cash flows, ...
Payback Period Calculator
Calculate simple and discounted payback periods for capital projects — with uneven cash flows, WACC, and breakeven analysis.
Simple Payback** = $$\frac{\text{Initial Investment}}{\text{Annual Cash Flow}}$$
→ Ignores time value of money, but fast for screening.
Discounted Payback** = First year where cumulative *discounted* cash flow ≥ investment
Discounted Cash Flow (Year t) = $$\frac{\text{Cash Flow}_t}{(1 + r)^t}$$
Example** ($50K investment, $12K/yr, 8% WACC):
- Simple = $50,000 / $12,000 = **4.17 years**
- Discounted: Y1: $11,111, Y2: $10,288, Y3: $9,526, Y4: $8,820, Y5: $8,167 Cumulative by Y5: $47,912 → still short Y6: $7,562 → **5.1 years** to recover $50K in PV terms
✅ When to Use Payback**:
- Quick screening of many projects
- Liquidity-constrained firms (need fast recovery)
- High-risk/short-life projects (tech, marketing)
⚠️ Avoid these common mistakes:
- Ignoring cash flow after payback** — a 3-yr project may have $100K in Y4–Y10
- Using accounting profit vs. cash flow** — depreciation skews simple payback
- “<1 year payback” claims** — often exclude maintenance, training, or capex
- No discounting in high-inflation environments** — 10% inflation = 10% real discount rate
✅ Pro Tips**:
- Always pair payback with **NPV** or **IRR** for final decisions
- For SaaS: use **payback on CAC** (Customer Acquisition Cost)
- Apply **hurdle rates**: 2–3 yrs for equipment, ≤18 mos for digital
| Project Type | Simple Payback | Discounted (10% WACC) | Hurdle |
|---|---|---|---|
| Solar Panels | 4.0–6.0 yrs | 5.0–7.0 yrs | ≤6 yrs |
| Rental Rehab | 2.5–3.5 yrs | 3.0–4.0 yrs | ≤4 yrs |
| SaaS Feature | 12–24 mos | 15–30 mos | ≤18 mos |
| Marketing Campaign | 6–18 mos | 8–24 mos | ≤12 mos |
📉 Rule of Thumb**:
- Good**: ≤3 years (equipment), ≤2 years (real estate), ≤18 mos (digital)
- Fair**: 3–5 years
- Poor**: >5 years (unless strategic or cash flow is lumpy)
➡️ Simple Payback
“$50K investment, $12K/yr savings — how fast do I get my money back?”
➡️ Discounted Payback
Same project, but account for 8% cost of capital — when does PV break even?
➡️ Uneven Cash Flow
Model $20K campaign: $8K (Y1), $12K (Y2), $10K (Y3) — see exact breakeven quarter.
Note: Discounted payback uses cumulative present value. NPV at payback = 0 by definition for simple, but negative for discounted (until full recovery).