What is the payback period?
The time it takes for an investment's cash flows to repay its initial cost. A $50,000 machine generating $12,000/year pays back in about 4.2 years. It's the most intuitive capital budgeting metric — "how long until I get my money back" — and doubles as a rough risk measure, since longer paybacks mean longer exposure.
What is the discounted payback period?
The same idea, but with future cash flows discounted to present value first. Because a dollar in year 5 is worth less than one today, discounted payback is always longer than simple payback — and some projects never pay back at all on a discounted basis, meaning they destroy value at your required return. This calculator flags exactly that case.
What are the limitations of payback period?
It ignores everything after breakeven: a project paying back in 4 years then producing profit for 20 more beats one that pays back in 3 and dies — but simple payback ranks them backwards. It also ignores the time value of money unless discounted. Use it as a quick screen alongside NPV and IRR, not as the deciding metric.
What is a good payback period?
Entirely context-dependent: fast-changing tech might demand under 2–3 years, while infrastructure and real estate tolerate 10–20. A common small-business rule of thumb is requiring payback within half the asset's useful life. Shorter is safer, but demanding too-short paybacks systematically rejects the most valuable long-term investments.
Why do companies still use payback if it ignores everything after the cut-off?
Because it answers a different question from NPV — not "is this profitable?" but "how long is our money exposed?". That matters when cash is tight, when the technology may be obsolete in four years, or when the political or regulatory environment makes distant cash flows genuinely unforecastable. Payback is also quick to compute and easy to explain, which makes it a workable screen for small decisions. The sound approach is to use it alongside NPV as a liquidity and risk check, never as the deciding measure on its own.
How does payback differ from ROI?
Payback is measured in time and ROI in percentage, and they can rank the same projects differently. A project returning a modest amount quickly may have a short payback and an unremarkable ROI; one returning a great deal slowly may show the reverse. Neither accounts for what happens across the whole life of the investment in the way NPV does, and simple payback ignores the time value of money entirely — which is what the discounted version corrects. Read them together rather than picking whichever flatters the proposal.