Quick answer: A 10,000 investment returning 3,000, 4,000, 4,000 and 5,000 a year pays back in 2.75 years; discounted at 10% a year it takes 3.28 years.
How it's calculated
Add the yearly cash flows until they reach the investment. Payback = full years before that point + the amount still to recover ÷ the cash flow of the year it is recovered, assuming cash arrives evenly through the year.
Discounted payback does the same with each year's cash flow divided by (1 + r)^t, so money received later counts for less. It is always longer than simple payback.
Payback says nothing about cash after the payback year, so a quick payback is not always the better project. Compare with the IRR and NPV calculator.
Worked examples
- 10,000; 3,000, 4,000, 4,000, 5,000: 2 + 3,000 ÷ 4,000 = 2.75 years
- Discounted at 10%: 3 + 961.68 ÷ 3,415.07 = 3.28 years
- 50,000 solar system saving 8,000 a year: 50,000 ÷ 8,000 = 6.25 years
Frequently asked questions
What is a good payback period?
Shorter is less risky. Many businesses look for two to five years; long-lived assets like solar panels can justify longer.
Can I enter the same cash flow every year?
Yes: enter one value and it is repeated each year.
Why use discounted payback?
Because money received in five years is worth less than money today. It gives a more realistic time when the discount rate is high.
Does payback show total profit?
No. It ignores everything received after the investment is recovered, so a project can pay back quickly yet earn less overall.
How is payback different from IRR?
Payback tells you how quickly the money comes back. IRR measures the return over the whole project. Together they show speed and profit.
What if the investment never pays back?
If the cash flows you enter don't reach the investment, the result says so. Add more years if you expect further income.