The Payback period is an indicator of the repayment characteristics of an investment. It basically answers the question of how long it takes for the investment to amortize. If the PBP is 4, for example, this means that the initial investment is recovered in the 4th period.
The standard PBP does not consider any discount rates, hence the preference of time is not reflected in the resulting payback period. This leads to an inaccurate result which can be acceptable for rough assessments and short-time projections. However, it may not be appropriate for long-term investments, an environment with comparatively high interest rates or return expectations and where precise indicators are required. You can find more about the payback period method on Wikipedia.
Nevertheless, if you are evaluating or comparing investment cases for your company, you can use it as a rough yet handy indicator of the time to the repayment of an investment.
The Payback Period (PBP) Calculator (Even and Irregular Cash Flows)
Fill in the required values, i.e. the initial investment and the projected net cash flows. The tool updates automatically and shows you the expected payback period for your series of cash flows.
The calculator requires the amounts of the initial investment and the projected cash flows. We will cover the details and provide some guidance in this section.
The investment, which is normally an outflow in period 0, represents a negative cash flow. For an initial investment of $1000, you will have to fill in -1000.
Do not forget to include costs related to your investment, e.g. if you buy securities, you will likely be charged a fee by your bank. If you buy a house or apartment, taxes and fees (or stamp duty) need to be considered as part of the initial investment as well.
The cash flows can be negative or positive. However, if you are investing your money, you are probably expecting that most, if not all, subsequent cash flows are positive.
There are two types of cash flows, and this calculator is able to calculate with both of them:
- Regular cash flows (e.g. annuity), also referred to as constant or even cash flows, and
- Irregular, varying or uneven cash flows
Regular cash flows
The cash flows are even, I.e. the amount is the same for each and every period. Thus, the calculator will only show a single cash flow input field if you select this type.
This selection makes sense if you invest in securities with a fixed interest and amortization payment schedule. You can also use this selection to approximate rental income or regular fees.
Note that the regular cash flow needs to be greater than 0 to allow for a payback period calculation.
Irregular cash flows
If you select uneven cash flows, you need to feed the calculator with annual net cash flows for up to 10 years. These cash flows can be positive, negative or 0, whichever you are forecasting for a certain year.
This selection is applicable to investments with variable returns. This may include for instance securities, bonds or shares with uneven payments, but also investments in a business with returns that change over time.
We hope you have found this calculator useful! Make sure you also have a look at our other finance calculators when you are assessing investments.