Payback Period Calculator
What It Does:
Calculates how long it takes to recover the initial investment cost from cash inflows (profits/savings).
Key Terms:
Initial Investment: The upfront cost of the project or investment.
Cash Inflows: Annual (or periodic) profits/savings generated by the investment.
Payback Period: Time (in years/months) needed to “break even.”
Formula (Simple Payback Period):
Payback Period=Initial InvestmentAnnual Cash InflowPayback Period=Annual Cash InflowInitial Investment
Note: If cash inflows vary yearly, add them up until the initial investment is recovered.
Example:
Initial Investment: $50,000
Annual Cash Inflow: $10,000
Payback Period=50,00010,000=5 yearsPayback Period=10,00050,000=5 years
When to Use It:
Quick comparison of project risks.
Short-term investment decisions (ignores time value of money).
Limitations:
Doesn’t consider profits after payback.
Ignores the time value of money (use Discounted Payback Period for that)
