Payback Period Calculator

Calculate the time required to recoup the cost of an investment.

Tip: You can use simple math in the fields. For example, type10 * 4 + 2 to calculate 42.
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What is Payback Period?

Payback Period is the amount of time it takes for an investment to recover its initial cost through the cash flows it generates.

Payback Period is calculated by dividing the initial investment by the annual cash flow, showing how long it takes for a project to pay for itself.

Understanding Payback Period helps businesses and investors decide which projects to pursue and compare investment opportunities.

It’s a simple way to assess investment risk, with shorter periods generally considered less risky.

However, Payback Period has limitations, not accounting for cash flows after the payback period or the time value of money.

Despite drawbacks, many companies use it as a quick evaluation tool, especially useful for small businesses or when cash flow is a major concern.

Payback Period Formula

Given:Initial Investment=IIAnnual Cash Flow=ACFCalculate:Payback Period=PP=IIACF\begin{gather*}\bold{Given{:}}\newline\begin{aligned}\text{Initial Investment} &= \mathrm{II}\newline\text{Annual Cash Flow} &= \mathrm{ACF}\end{aligned}\newline\bold{Calculate{:}}\newline\text{Payback Period} = \mathrm{PP} \newline = \frac{\mathrm{II}}{\mathrm{ACF}}\end{gather*}

Payback Period Calculation Examples

Example 1

Consider a renewable energy project requiring an initial investment of $500,000 to install solar panels.

The project is expected to generate annual savings (cash flow) of $100,000/year through reduced electricity costs.

The payback period for this green investment is calculated as follows:

Given:Initial Investment (II)=$500,000Annual Cash Flow (ACF)=$100,000/yearCalculate:Payback Period (PP)=IIACF=$500,000$100,000/year=5 years\begin{gather*}\bold{Given{:}}\newline\begin{aligned}\text{Initial Investment}\space(\mathrm{II}) &= \mathrm{{\$}500{,}000}\newline\text{Annual Cash Flow}\space(\mathrm{ACF}) &= \mathrm{{\$}100{,}000/year}\end{aligned}\newline\bold{Calculate{:}}\newline\text{Payback Period}\space(\mathrm{PP})\newline\begin{aligned}&= \frac{\mathrm{II}}{\mathrm{ACF}}\newline&= \frac{\mathrm{{\$}500{,}000}}{\mathrm{{\$}100{,}000/year}}\newline&= \mathrm{5~years}\end{aligned}\end{gather*}

This indicates that it will take 5 years to fully recover the initial investment through energy savings.

After this period, the solar panels will continue to generate savings, contributing to long-term financial and environmental benefits.

Example 2

Imagine a small pharmaceutical company investing $750,000 in research and development for a new drug. The company estimates that, once approved, the drug will generate annual profits (cash flow) of $150,000/year.

To determine how long it will take to recover this substantial R&D investment, we calculate the payback period:

Given:Initial Investment (II)=$750,000Annual Cash Flow (ACF)=$150,000/yearCalculate:Payback Period (PP)=IIACF=$750,000$150,000/year=5 years\begin{gather*}\bold{Given{:}}\newline\begin{aligned}\text{Initial Investment}\space(\mathrm{II}) &= \mathrm{{\$}750{,}000}\newline\text{Annual Cash Flow}\space(\mathrm{ACF}) &= \mathrm{{\$}150{,}000/year}\end{aligned}\newline\bold{Calculate{:}}\newline\text{Payback Period}\space(\mathrm{PP})\newline\begin{aligned}&= \frac{\mathrm{II}}{\mathrm{ACF}}\newline&= \frac{\mathrm{{\$}750{,}000}}{\mathrm{{\$}150{,}000/year}}\newline&= \mathrm{5~years}\end{aligned}\end{gather*}

This calculation shows that it will take 5 years for the pharmaceutical company to recoup its initial R&D investment.

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