Payback Period Calculator - Calculate Payback Period & Net Present Value With Irregular Cash Flows

How to Read Your Financial Results?

Payback Period

The time it takes to recover your initial investment using nominal cash flows (not adjusted for time value of money).

Discounted Payback Period

The time it takes to recover your initial investment using discounted cash flows (adjusted for time value of money). This is typically longer than the simple payback period.

Cash Flow Return Rate (IRR)

The internal rate of return - the discount rate that makes the net present value of all cash flows equal to zero. Compare this to your required rate of return.

What Financial Formulas Are Used?

Simple Payback Period

Payback Period = Initial Investment ÷ Average Annual Cash Flow

The simple payback period calculates how long it takes to recover the initial investment without considering the time value of money.

Discounted Payback Period

Discounted Cash Flow = Cash Flow ÷ (1 + Discount Rate)^n

Where n = number of years

The discounted payback period accounts for the time value of money by discounting future cash flows to their present value.

Internal Rate of Return (IRR)

NPV = Σ [Cash Flow_t ÷ (1 + IRR)^t] = 0

Where t = time period and NPV = Net Present Value

IRR is the discount rate that makes the net present value of all cash flows equal to zero.

References

• U.S. Small Business Administration - Calculate Your Startup Costs
• U.S. Department of Treasury - Government Bonds Information
• Federal Reserve - Interest Rate Statistics
• U.S. Bureau of Economic Analysis - Economic Data
• SEC.gov - Ten Things to Consider Before You Make Investing Decisions
• Investor.gov - Risk and Return