Payback Period Calculator

What is the Payback Period?

The payback period is the time you need to recover the cost of your investment. In simple terms, it is the time an investment takes to reach the break-even point. It would help if you retrieved the investment costs of a project as soon as possible to make a profit. 

The payback period shows you the time taken to recover the cost of the project. The payback period helps you to evaluate the associated risks of an investment. An investment may have a short or a long payback period. 

If your investment has a short payback period, you may quickly recover the cost of the investment. You may select a project or an investment that has a short payback period. The payback period in capital budgeting gives the number of years it takes for you to recover the cost of the investment. 

What is the Payback Period Calculator?

A payback period calculator is a utility tool that shows you the time taken to recover the cost of the project or an investment. You can determine the number of years it takes to recover the cost of the investment. The payback period calculator consists of a formula box, where you enter the initial investment and the periodic cash flow. The payback period will show you the payback period of the investment.

How does a Payback Period Calculator work?

The payback period calculator shows you the time taken to recover the cost of the investment. To calculate the payback period, you can use the mathematical formula: 

Payback Period = Initial investment / Cash flow per year 

Example

Let’s understand how the payback calculator works with some examples

Example 1: Assume you have invested Rs 1,00,000 with an annual payback of Rs 20,000. 

• Payback Period = Initial investment / Cash flow per year 
• Payback Period = 1,00,000/20,000 
• Payback Period = 5 years. 

You may calculate the payback period for uneven cash flows. 

Example 2: Assume you have invested Rs 2,00,000 in a project. 

You expect,

• Rs 70,000 in the first year of the project, 
• Rs 60,000 in the second year of the project, 
• Rs 55,000 in the third year of the project, 
• Rs 40,000 in the fourth year of the project, 
• Rs 30,000 in the fifth year of the project 
• Rs 25,000 in the sixth year of the project. 

Initial investment = Rs 2,00,000. 

Payback period = Years before full recovery + Unrecovered cost at the start of the year / Cash flow during the year. 

You have year 3, which is the last year before the investment turns positive. 

You have the unrecovered investment at the start of the fourth year, which is the initial investment (Rs 2,00,000) minus the cumulative cash flow at the end of the third year (Rs 1,85,000). Payback Period = 3 + (2,00,000 – 1,85,000) / 40,000 = 3.375 years.

How to use the Payback Period Calculators?

The Payback Period Calculator helps you to evaluate the cost of the project or the investment. To use the Payback Period Calculator:

• You must enter the initial value of the investment.
• Enter the net annual cash flow.
• The ClearTax Payback Period Calculator shows you the payback period in years.

You can also use the Payback Period Calculator to calculate the uneven cash flows:

• You must enter the initial value of the investment.
• Enter the cash flows for each year.
• The ClearTax Payback Period Calculator shows you the payback period in years.

Benefits of Payback Period Calculators

A payback calculator basically comes with these benefits:

• It helps you evaluate the benefits of an investment or the cost of a project.
• It is a simple method to calculate return on investment.
• You get to know the risk and the liquidity involved in an investment.
• It helps you reinvest earnings and make a profit.