How to calculate the payback period
- Enter the upfront investment: the cost of equipment, a project, a marketing campaign or acquiring a customer.
- Enter the cash it brings in each year or month, and optionally how fast that grows. For uneven amounts, list the cash flows one per line.
- See how long until you get your money back, the discounted payback period that accounts for the time value of money, and the net present value.
Payback versus discounted payback
The payback period is the time it takes for cumulative cash inflows to equal the initial investment. Spend 25,000 to save 6,000 a year and you break even after 25,000 ÷ 6,000 ≈ 4.2 years. It is easy to explain and favours projects that return cash quickly, which matters for small businesses where cash is tight.
Simple payback ignores two things. First, money later is worth less than money now, so the discounted payback period discounts each future cash flow at your cost of capital or required return before adding them up; it is always longer than simple payback. Second, payback ignores everything after the break-even point, so a project that pays back in three years and then stops can look better than one that pays back in four and keeps earning for ten. Net present value covers both issues, and the table shows the full picture year by year. For SaaS, the same idea is used as CAC payback: months of gross profit to recover the cost of acquiring a customer. Calculated in your browser.
What is a good payback period?
Shorter is better. Many businesses want equipment and efficiency projects to pay back within 2–5 years; SaaS companies aim for CAC payback under 12–18 months.
What is the payback period formula?
For even cash flows: initial investment ÷ cash inflow per period.
Why use a discount rate?
To reflect that cash received in the future is worth less than cash today, because it could have been invested elsewhere.