Investment appraisal Updated November 2026

Payback period

The payback period is the number of years until cumulative cash inflows recover the initial investment. With even inflows, payback = investment / annual inflow. With uneven inflows, count the full years before recovery and add the unrecovered amount divided by the next year's inflow. It ignores the time value of money.

Syntax

payback = years before full recovery + (unrecovered cost at start of year) / (cash flow during the year)

Part	What it is
`investment`	Initial outlay at time 0
`cash inflows`	Net cash received each year

Examples

Invest 5,000, receive 2,000 a year
5,000 / 2,000

Result: Payback = 2.5 years

Invest 10,000; inflows 3,000, 4,000, 5,000
After year 2: 7,000 recovered, 3,000 left
2 + 3,000 / 5,000

Result: Payback = 2.6 years

Invest 1,000; inflows 500, 500, 500
After year 2: 1,000 recovered

Result: Payback = 2.0 years

Common mistakes

Dividing the investment by the average inflow when inflows are uneven; use the cumulative method year by year.
Using it as the only criterion: a project with a 2-year payback and nothing after it can be worse than one with a 3-year payback and large later inflows.
Forgetting that the fraction assumes cash arrives evenly through the year; if it arrives at year end, payback is the next whole year.

Practice Payback period

These drills check your answer on live data, free, no account needed.

Payback periodA machine costs $110,000 and is expected to save $34,000, $30,500, $51,000, $42,500 and $32,000 in years 1 to 5, earned evenly through each year. What is its payback period in years, to 2 decimals?

Questions

What is a good payback period?

It depends on the industry and the asset life. Many companies set a cutoff of 2 to 4 years for equipment; longer-lived infrastructure accepts longer paybacks. Always check NPV as well.

Why is payback still used if it ignores time value?

It is simple, it measures liquidity and risk (money tied up for less time), and it is a quick screen before doing a full NPV analysis.

Discounted payback periodThe discounted payback period counts the years until the present value of inflows recovers the investment. Examples at 10% and 8% versus simple payback.
NPV (net present value)Net present value is the sum of discounted cash flows minus the initial investment. Examples at 10% and 8%, the accept rule, Excel NPV and the sign mistake.
IRR (internal rate of return)The IRR is the discount rate that makes NPV zero. How to find it by trial, what Excel IRR returns, worked examples, the accept rule and where IRR fails.
Profitability indexThe profitability index is the present value of future cash flows divided by the initial investment, or 1 + NPV / investment. Examples and the accept rule.