# Payback Period Calculator

How long will it be until I get my money back?

## What Is the Payback Period?

This formula is used to determine how long it will take for an investment to return the money invested.

## Why Is it Important?

• The more quickly an investment is paid back, the more quickly it can be reinvested into other ventures.
• The slower an investment is paid back, the more risk is involved. You know what they say, "it's difficult to make predictions - especially about the future."

## Formula(s) to Calculate Payback Period

• PAYBACK PERIOD = INVESTMENT / CASH FLOW PER PERIOD

## Common Mistakes

• Forgetting about units of measure. One firm may have a payback period of 1.2 years while another has a payback of 1.2 months. Clearly, the opportunities are not equivalent.
• Assuming that all investments are perpetual. A firm with a slower payback that continues for a long time may be more valuable than one with a faster payback that only leads to break-even.
• Not thinking about inflation or opportunity costs.
• Not agreeing upon how fractions of a period should be calculated. Some investments can only pay out on complete periods, while others pay on a continuous basis. For instance, a magazine that bills quarterly will have no payback at any point except at the end of each quarter.