Payback Period Calculator
The payback period tells you how long it takes to recover an investment from its cash flows. The discounted payback period factors in the time value of money using a discount rate. Combined with NPV, it helps you decide if a business investment, equipment purchase, or project is financially viable.
Frequently Asked Questions
What is the difference between simple and discounted payback period?+
Simple payback = Initial Investment / Annual Cash Flow. It ignores time value of money. Discounted payback discounts each year's cash flow to present value first — taking longer to recover because future money is worth less. For decisions involving capital allocation, use discounted payback.
What is a good payback period?+
Depends on the industry and type of investment. Equipment/machinery: 2–5 years is typical. Real estate: 8–15 years. Software/IT projects: 1–3 years. As a rule: payback period should be shorter than the asset's useful life. For high-risk investments, require a shorter payback. Accept longer periods only for strategic or irreplaceable assets.
What is NPV and why does it matter more than payback period?+
NPV (Net Present Value) measures total wealth created by the investment in today's rupees. A positive NPV means the investment generates more value than the cost of capital. Payback period only tells you when you recover cost — it ignores returns after that point. Always check both: payback (risk) + NPV (value).
What discount rate should I use?+
Use your WACC (Weighted Average Cost of Capital) if known. Common approximations: 10% for stable businesses, 12–15% for growth/riskier projects, 8% for government/utilities. The higher the risk, the higher the required rate. If uncertain, use 10–12% for most business investments in India.