Financial Calculators

Payback Period Calculator

The payback period calculator allows you to estimate how long it will take to make a profit on an initial investment.

Payback Period Calculator

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Payback Period:
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Table of contents

How long is the payback period?
Formula for a discounted payback period

How long is the payback period?

Imagine you're going to invest $100,000 in an apartment. It will be rented to tenants at $24,000 per year. What is the minimum amount of years it will take to make this investment pay off?
The payback time is the period between now and when your investment will be recouped. It is the sum of the total investment and the annual cash flow.
PP = I / C
Where
PP refers to the payback period in Years,
I refers to the sum that you have invested.
C refers to the annual net cash flow - how much you earn.
This equation can be used to estimate the payback time for an apartment.
PP = $100,000 / $24,000 = 4.17 years

Formula for a discounted payback period

If you take into consideration the time-value of the money formula, then things get a little more complicated. Your $100,000 won't be the same value after ten years. In fact, they will be much less. Your money will decrease by a certain amount each year. This is called the discount rates.
The discounted payback period takes into account the depreciation of your funds, unlike the regular payback periods. Although it is more optimistic, the value you get from the discount payback period calculator will be closer in line with reality.
This metric can be easily calculated if cash flows are consistent (each year you earn the same amount of money). The following formula can be used to calculate the cash flow:
DPP = - ln(1 - I * R / C) / ln(1 + R)
Where
DPP refers to the year-long discounted payback period.
R refers to the discount rate
I refers to the sum that you have invested.
C refers to the annual cash flow - how much you earn.
The difference between the PP and DPP can be checked by clicking on the example apartment. Let's say that 5% is the discount rate.
DPP = - ln(1 - $100,000 * 0.05 / $24,000) / ln(1 + 0.05) = 4.79 years

Parmis Kazemi
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Parmis Kazemi
Parmis is a content creator who has a passion for writing and creating new things. She is also highly interested in tech and enjoys learning new things.

Payback Period Calculator English
Published: Mon Jul 11 2022
In category Financial calculators
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