Payback Period Calculator (2024)

FAQs

How do you calculate exact payback period? ›

The payback period is calculated by dividing the amount of the investment by the annual cash flow. Account and fund managers use the payback period to determine whether to go through with an investment.

If the cash flows are even you have the formula: Payback Period = Initial Investment / Net Cash Flow per period If the cash flows are uneven you have: Payback Period = Years before full recovery + Unrecovered cost at the start of the year / Cash flow during the year The ClearTax Payback Period Calculator calculates the ...

What is Payback Time? The Rule #1 Payback Time calculator estimates the number of years it would take the earnings of the company to cover the cost of the stock price. It gives you a sense, as an owner, of how long it would take you to get your investment back, based on the company's historical earnings stream.

Most broadly speaking, a good payback period is the shortest payback period possible. It is generally considered “healthy” for a SaaS company to have a payback period of 1 year, although it will vary throughout your company's lifetime as the various factors that contribute to the payback period fluctuate and evolve.

The formula is: Payback Period = Initial Investment Annual Cash Inflows Substituting the values from your project into the formula: Payback Period = 150 , 000 50 , 000 = 3 years This tells you that it would take three years to recoup your initial investment, provided the projected cash inflows occur as anticipated.

First, input the initial investment into a cell (e.g., A3). Then, enter the annual cash flow into another (e.g., A4). To calculate the payback period, enter the following formula in an empty cell: "=A3/A4" as the payback period is calculated by dividing the initial investment by the annual cash inflow.

The payback method answers the question “how long will it take to recover my initial $50,000 investment?” With annual cash inflows of $10,000 starting in year 1, the payback period for this investment is 5 years (= $50,000 initial investment ÷ $10,000 annual cash receipts).

KEY POINTS. Payback ignores the time value of money. Payback ignores cash flows beyond the payback period, thereby ignoring the "profitability" of a project. To calculate a more exact payback period: Payback Period = Amount to be Invested/Estimated Annual Net Cash Flow.

You can calculate the payback period by accumulating the net cash flow from the the initial negative cash outflow, until the cumulative cash flow is a positive number. When the cumulative cash flow becomes positive, this is your payback year.

It's used to calculate the doubling time or growth rate of investment or business metrics. This helps accountants to predict how long it will take for a value to double. The rule of 69 is simple: divide 69 by the growth rate percentage. It will then tell you how many periods it'll take for the value to double.

Why is the payback method not highly recommended? ›

It focuses only on the time it takes to recoup the initial investment and ignores any cash flows that occur after the payback period. This can lead to ignoring the profitability of a project in the long run. The method does not consider the profitability of the project.

The shortest payback period is generally considered to be the most acceptable. This is a particularly good rule to follow when a company is deciding between one or more projects or investments. The reason being, the longer the money is tied up, the less opportunity there is to invest it elsewhere.

In summary, a longer payback period is generally seen as riskier for investors due to the time value of money, the uncertainty of future cash flows, and the increased risk of default. Therefore, investors often seek investments with shorter payback periods to minimise these risks.

Payback period Formula = Total initial capital investment /Expected annual after-tax cash inflow.