What is a good payback period?

A "good" payback period varies significantly by industry and investment type. For SaaS investments, 12-18 months is typically acceptable. Equipment purchases often target 3-5 years. Marketing campaigns should aim for 6-12 months. Capital-intensive projects may accept 5-10 years. Generally, shorter is better, but you should compare against your industry benchmark and consider the investment's strategic value beyond pure payback.

What is the difference between simple and discounted payback period?

Simple payback period calculates how long until cumulative cash flows equal your initial investment, treating all dollars equally regardless of when they're received. Discounted payback period accounts for the time value of money—a dollar today is worth more than a dollar next year. Discounted payback uses a discount rate (typically your cost of capital or required return) to adjust future cash flows to present value, giving a more accurate picture for longer-term investments.

How do I calculate payback period with uneven cash flows?

For uneven cash flows, you can't use the simple formula (Initial Investment ÷ Annual Cash Flow). Instead, calculate cumulative cash flows year by year until they exceed your initial investment. The payback period is the last full year before break-even, plus (remaining amount ÷ next year's cash flow). Our calculator handles this automatically—just enter each year's expected cash flow.

Why is payback period important for investment decisions?

Payback period helps assess investment risk and liquidity. Shorter payback means faster capital recovery, reducing exposure to uncertainty. It's especially valuable for: 1) Comparing mutually exclusive projects, 2) Setting investment hurdle rates, 3) Evaluating projects in volatile industries, 4) Cash-constrained businesses prioritizing liquidity. However, it should be used alongside NPV and IRR for complete analysis.

What discount rate should I use for discounted payback period?

Use your weighted average cost of capital (WACC) as a starting point—typically 8-12% for most businesses. If the investment is riskier than your average project, add a risk premium (2-5%). For personal investments, use your opportunity cost—what return could you get elsewhere? Common benchmarks: Conservative (5-7%), Moderate (8-12%), Aggressive/High-risk (15-20%).

How does payback period compare to NPV and IRR?

Payback period measures time to recover investment (risk/liquidity focus). NPV measures total value created in today's dollars (wealth maximization). IRR measures the rate of return percentage (efficiency). Use payback period for quick risk assessment and screening, NPV for final go/no-go decisions on value creation, and IRR for comparing projects of different sizes. Smart investors use all three together.

Payback Period Calculator

Calculate your investment payback period in seconds. Compare simple vs discounted methods, see industry benchmarks, and get AI recommendations.

Enter Your Values

Initial Investment*

Total upfront cost of the investment or project

Annual Cash Flow*

Expected net cash inflow per year from the investment

Discount Rate (Optional)

Your required rate of return or cost of capital (typically 8-12%)

Project Lifespan (Years)

years

Expected useful life of the investment

Formula

Payback Period = Initial Investment ÷ Annual Cash Flow

Simple payback tells you when you'll recover your investment in nominal terms. Discounted payback accounts for the time value of money—adjusting future cash flows by your discount rate to show when you'll recover your investment in today's dollars.

Simple Payback Period (Years)3.33

3.3 years — Acceptable for manufacturing equipment or major capital projects.

Discounted Payback Period4.3 years

Time Value Adjustment+0.9 years

Total Net Return$200,000

Total ROI200.0%

Net Present Value (NPV)$84,337

Cash Yield (Annual)30.0%

Est. Break-even DateMay 2029

Payback Risk LevelModerate Risk

Monthly Cash Flow$2,500

Payback Period Benchmarks by Investment Type

Marketing<1 year — Marketing campaigns, quick ROI

< 1

SaaS/Technology1-2 years — Software, SaaS investments

1.01 – 2

Tech Upgrade2-3 years — Technology upgrades

2.01 – 3

Equipment3-5 years — Manufacturing equipment

3.01 – 5

Capital/Real Estate5+ years — Real estate, major capital projects

> 5.01

Source: Industry Capital Budgeting Standards 2024

How to Calculate Payback Period

Enter your initial investment amount (total upfront cost)
Enter your expected annual cash flow from the investment
Optionally set your discount rate for discounted payback calculation
Set the project lifespan for total return calculations
View your simple and discounted payback periods
Compare against industry benchmarks for your investment type
Get AI-powered recommendations for your investment decision

Payback Period Benchmarks by Investment Type

12-18 months

SaaS Software Investment

3-5 years

Manufacturing Equipment

6-12 months

Marketing Campaign

5-10 years

Real Estate Investment

2-3 years

Technology Upgrade

5-8 years

Solar/Energy Project

Source: Industry Capital Budgeting Standards 2024

Payback Period Calculator

Payback Period Benchmarks by Investment Type

How to Calculate Payback Period

Payback Period Benchmarks by Investment Type

Frequently Asked Questions

What is a good payback period?

What is the difference between simple and discounted payback period?

How do I calculate payback period with uneven cash flows?

Why is payback period important for investment decisions?

What discount rate should I use for discounted payback period?

How does payback period compare to NPV and IRR?