How to Calculate Payback Period
What is Payback Period?
The payback period is the time required for an investment to generate enough cash flow to recover its initial cost. It is the simplest capital budgeting metric — shorter is generally better, though it ignores the time value of money.
Step-by-Step Guide
- 1Identify the initial investment amount
- 2Estimate the annual (or periodic) cash inflows the investment generates
- 3Simple payback = Initial investment / Annual cash inflow
- 4For uneven cash flows, cumulate inflows year by year until the investment is recovered
Worked Examples
Input
Investment £10,000 · Annual inflow £2,500
Result
4.0 years payback
£10,000 ÷ £2,500
Input
Solar panels £8,000 · Annual saving £1,200
Result
6.7 years payback
Typical residential solar payback
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