Payback Period Calculator
Answers the Question
How long will it be until I get my money back?
Calculator for Payback Period
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
- 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.