Discounted Payback Period Calculator

How it is calculated

Each year's cash flow is discounted to today and added to a running total until the total reaches the investment.

PVt = CF ÷ (1 + r)t

payback = (t − 1) + (I − cumulativet−1) ÷ PVt

CF is the equal annual cash flow in dollars, r the discount rate as a decimal (8% = 0.08), I the initial investment and t the first year in which the running total reaches I. The fraction of that last year is found by straight-line interpolation. The simple payback is just I ÷ CF. The tool checks up to 100 years and shows nothing if the investment is not recovered by then. A rate of 0 is allowed and makes both paybacks equal; negative rates are rejected. The last result adds the whole of year t, so it is the total at the end of that year, not at the fractional payback moment.

Common mistakes

• Entering the discount rate as a decimal. The field takes percent: 8 means 8%, while 0.08 would discount at 0.08% and give a result close to the simple payback.
• Putting the total of all expected cash in the annual field. It must be the amount received in one year; the tool repeats it every year.
• Comparing the discounted payback with the simple one and expecting equality. With any positive rate it is longer; only a 0% rate makes them match.
• Expecting a number when the cash flow is too small. If the discounted flows never add up to the investment within 100 years (for example $3,000 a year on $50,000 at 8%), no result is shown.
• Reading the final dollar figure as the cash at the exact payback moment. It is the discounted total at the end of the whole year in which payback happens.