What is the payback period formula?

For equal cash flows: initial investment ÷ annual cash flow. For uneven cash flows: A + B ÷ C, where A is the last year with a negative cumulative total, B the unrecovered amount at the end of A and C the cash flow in year A + 1.

What is a good payback period?

It depends on the business and the life of the asset; many firms set a maximum such as 3 or 5 years. It must be well within the useful life of the investment.

What are the drawbacks of the payback period?

It ignores the time value of money and any cash flows after the payback point, so it can favour short, low-value projects.

What if the investment is never recovered?

The calculator reports that the investment is not paid back within the cash flows entered.

Payback Period Formula and Calculator

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Payback Period Calculator

The payback period is the time it takes for an investment’s cash inflows to add up to its initial cost. It is the simplest capital budgeting measure and is popular with small businesses because it answers a practical question: how long is my money at risk? A shorter payback means a faster return of capital.

Formula

Payback period = A + BC

Where

A: last full period before the cumulative cash flow turns positive
B: amount still unrecovered at the end of period A
C: cash flow during period A + 1

Calculator

Initial investment

Cash inflows for periods 1, 2, 3, …

Separate values with commas, spaces or new lines.

Result and step-by-step solution

Payback period

3.25 periods

The 50,000.00 investment is recovered 3 months into period 4 (if periods are years).

Start from the investment
Cumulative position at time 0 = −50,000.00
Add each period’s cash flow
Period Cash flow Cumulative
1 12,000.00 −38,000.00
2 15,000.00 −23,000.00
3 18,000.00 −5,000.00
4 20,000.00 15,000.00
5 10,000.00 25,000.00
Find the period where the total turns positive
After period 3 there is 5,000.00 left to recover; period 4 brings in 20,000.00.
Interpolate within that period
Payback = 3 + 5,000.0020,000.00 = 3 + 0.25 = 3.25 periods

Period	Cash flow	Cumulative
1	12,000.00	−38,000.00
2	15,000.00	−23,000.00
3	18,000.00	−5,000.00
4	20,000.00	15,000.00
5	10,000.00	25,000.00

How to use the formula

With equal annual cash flows, payback is just investment ÷ annual cash flow. With uneven cash flows, which is the general case handled here, you accumulate the flows year by year until the running total turns positive. The payback is the last full year before that point, A, plus the fraction of the next year needed to recover the rest: B ÷ C, where B is the amount still unrecovered and C is the cash flow of the following year.

In the example, 50,000 is invested and the inflows are 12,000, 15,000, 18,000, 20,000 and 10,000. After three years 45,000 has come back, leaving 5,000, and year four brings 20,000, so payback is 3 + 5,000 ÷ 20,000 = 3.25 years. Payback ignores the time value of money and everything after the payback date, so pair it with NPV or use the discounted payback period.

Frequently asked questions

What is the payback period formula?: For equal cash flows: initial investment ÷ annual cash flow. For uneven cash flows: A + B ÷ C, where A is the last year with a negative cumulative total, B the unrecovered amount at the end of A and C the cash flow in year A + 1.
What is a good payback period?: It depends on the business and the life of the asset; many firms set a maximum such as 3 or 5 years. It must be well within the useful life of the investment.
What are the drawbacks of the payback period?: It ignores the time value of money and any cash flows after the payback point, so it can favour short, low-value projects.
What if the investment is never recovered?: The calculator reports that the investment is not paid back within the cash flows entered.

Last reviewed: September 26, 2026. Calculations run in your browser and were checked against numpy-financial, SciPy and published spreadsheet examples.