Payback Period Calculator for Uneven Cash Flows

Payback Period Calculation:

\[ \text{Payback Period} = \text{Year before full recovery} + \frac{\text{Unrecovered cost at start of year}}{\text{Cash flow during year}} \]

Initial Investment:

Cash Flows by Year:

Number of Years:

Year 1: $

Year 2: $

Year 3: $

Year 4: $

Year 5: $

Payback Period:

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is Payback Period?

The payback period is the time required for an investment to generate cash flows sufficient to recover the initial investment cost. For uneven cash flows, it's calculated by accumulating cash flows until they equal the initial investment.

2. How Does the Calculator Work?

The calculator uses the following method:

\[ \text{Payback Period} = \text{Year before full recovery} + \frac{\text{Unrecovered cost at start of year}}{\text{Cash flow during year}} \]

Where:

Year before full recovery - Last complete year before investment is recovered
Unrecovered cost - Initial investment minus cumulative cash flows up to that year
Cash flow during year - Cash flow in the year when recovery occurs

Explanation: The calculator sums cash flows year by year until the cumulative amount equals or exceeds the initial investment, then calculates the exact point during that year when payback occurs.

3. Importance of Payback Period

Details: Payback period helps assess investment risk - shorter payback means faster recovery of investment and lower risk. It's simple to understand but ignores cash flows beyond the payback period and time value of money.

4. Using the Calculator

Tips: Enter the initial investment amount and expected cash flows for each year. You can adjust the number of years to analyze. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between simple and discounted payback?
A: Simple payback ignores time value of money, while discounted payback uses present values. This calculator computes simple payback.

Q2: What is a good payback period?
A: Shorter is generally better, but acceptable period depends on industry standards and company policy (often 2-4 years).

Q3: What if payback isn't achieved in the entered years?
A: The calculator will indicate that payback wasn't achieved within the specified time frame.

Q4: How does this differ from ROI calculations?
A: Payback measures time to recover investment, while ROI measures profitability over the entire life of the investment.

Q5: What are the limitations of payback period?
A: It ignores cash flows after payback, doesn't consider time value of money, and doesn't measure profitability.