The payback period formula
Payback period = upfront cost ÷ cash it brings in per year
It’s also called the cash payback period, because it counts the cash coming in, not accounting profit.
Example: a $45,000 machine saves you $1,500 a month, or $18,000 a year. $45,000 ÷ $18,000 = 2.5 years, so you get your money back in 2 years and 6 months. If it lasts 5 years, it brings in $90,000: $45,000 more than it cost.
Uneven cash flows: add up the cash year by year. The payback period is the number of full years before you’re even, plus what’s still owed at the start of the next year divided by that year’s cash.
How long until you get your money back?
Every investment ties up cash: new equipment, a hire, a software build, a marketing push. The payback period tells you how long until the cash it brings in covers what you spent. It’s the quickest test of risk I know. The shorter the payback, the sooner that cash is free to use again.
What to enter
Enter the upfront cost and the cash the investment brings in, per month or per year. Use cash, not sales. If a new product line sells $5,000 a month and costs $3,500 a month to run, it brings in $1,500. Add how many years it keeps paying, if you know, to see the total return.
What payback leaves out
Payback stops counting the day you’re even. Two investments can both pay back in two years while one keeps earning for ten and the other dies in three. It also treats a dollar in year five like a dollar today. Use this payback period calculator to compare options quickly, then look at the total return before you commit.
FAQs
How do you calculate the payback period?
Divide the upfront cost by the cash the investment brings in each year. $45,000 ÷ $18,000 a year = 2.5 years. If the cash comes in unevenly, add it up year by year until the total covers the cost. The point where it does is your payback period.
How much payback period is good?
There’s no single right number. Compare it with two things: how long the investment keeps paying, and how long your cash lasts. A machine that pays back in three years but wears out in two never pays back. And a short payback matters more when cash is tight, because the money is tied up until it comes back.
Can you calculate payback period in Excel?
Yes. With even cash flows it’s one formula: =B1/B2, with the upfront cost in B1 and the cash per year in B2. With uneven cash flows, list each year’s cash in a column, add a running total next to it, and find the first year the total reaches the cost.
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