How payback period is calculated
Simple payback = initial investment ÷ annual net cash flow. For discounted payback, discount each year’s cash flow and accumulate it until the initial outlay is recovered, interpolating within the final year.
Worked example
An initial $50,000 outlay followed by $10,000 annual net cash inflows has a five-year simple payback. At a 0% discount rate, discounted payback is also five years.
Uneven cash flows
Choose Different each year and list the inflows for year 1, 2, 3 and so on. The calculator keeps a running total and finds the first year in which it reaches the investment, then interpolates: payback = years before recovery + (investment − cumulative inflow before that year) ÷ that year's inflow. The interpolation assumes the recovery year's cash arrives evenly through the year.
Example: $10,000 invested, then $3,000, $4,000, $5,000 and $2,000. After two years $7,000 is back, and year three brings $5,000, so payback is 2 + 3,000 ÷ 5,000 = 2.6 years. Discounted at 10%, the flows are worth $2,727.27, $3,305.79, $3,756.57 and $1,366.03; the first three total $9,789.63, so discounted payback is 3 + 210.37 ÷ 1,366.03 = 3.15 years.