Payback Period: When Does Your Investment Break Even?
The payback period is the length of time required to recover the initial cost of an investment from its cash inflows. It is the most intuitive capital budgeting metric — and deliberately simple. A shorter payback period means less risk.
Simple Payback Period
Payback period = Initial investment ÷ Annual cash inflow
(for equal annual inflows)
Example: £24,000 investment, £6,000/year inflow:
Payback = 24,000 ÷ 6,000 = 4 yearsUnequal Cash Flows
Accumulate cash flows year by year until the cumulative total equals the investment:
Year 1: £5,000 | Year 2: £7,000 | Year 3: £8,000 | Year 4: £6,000
Investment: £18,000
Cumulative: 5k → 12k → 20k → payback occurs in Year 3
Exact: 2 years + (18,000−12,000)÷8,000 = 2.75 yearsDiscounted Payback Period
Discount each year's cash flow to present value before accumulating. This accounts for the time value of money — a £6,000 inflow in year 4 is worth less than £6,000 today. Discounted payback is always longer than simple payback.
Limitations
- Ignores cash flows after payback — a 3-year payback project might earn for 20 years
- Simple version ignores time value of money
- Best used as a quick risk screen, not a standalone decision tool
Calculate payback period: Free Payback Period Calculator