Payback Period Calculator

What is the Payback Period?

The **Payback Period** is the amount of time it takes for an investment to generate cash inflows sufficient to recover its initial cost. It is a simple tool to assess the risk of a project: shorter payback periods are generally preferred because they recoup the initial capital faster.

How Payback Period is Calculated

• Constant Cash Flow: When periodic inflows are equal, the payback period is simply the initial investment cost divided by the annual cash flow.
• Variable Cash Flows: When periodic inflows fluctuate, we accumulate the cash inflows year-by-year until the initial investment is fully recovered. If it recovers mid-year, we use linear interpolation:
  Payback Period = Year Before Full Recovery + (Remaining Cost to Recover / Cash Flow in Recovery Year)