Use this payback period calculator for calculating payback period, average return, discounted payback period and the investment schedules. Basically, there are a couple of calculators and both have their own uses that will be described further below.
The payback period refers to the time required for reaching break-even point for your investment depending on your cash flow. For instance, if you have made an investment of $100 and it has $20 annual payback, the amount will pay you back completely in 5 years. Here is the formula:
PP = I/C
Here, PP refers to the payback period while I is the investment amount and C is annual cash flow.
One thing that is probably a major concern with the payback periods is the fact that it doesn't take into account 'time value of money'.
A solution to this issue is discounted payback period. It refers to the time period required for reaching break-even point depending on 'Net Present Value' of your cash flow. The calculation of NPV was based on discounted rate. For instance, for $100 investment with $20 annual payback and 10% discount rate, the NPV for initial $20 payback would be $20/1.1 which equals $18.18. NPV for second payback would be $20/1.12 which equals $16.53. Now this payback schedule would mean it will take 7.27 years for reaching break-even point that is obviously greater than five years. Here is the formula for discounted payback period:
DPP = - ln(1 - IR/C)/ln(1 + R)
Here, DPP refers to 'Discounted Payback Period' while I is the investment amount and C is annual cash flow. R refers to discount rate.
Both the payback period as well as discounted payback period is used widely and can be understood quite easily. However, they don't take into account the opportunity cost, risk, etc. They're all very important investment considerations.
As mentioned earlier, the payback period calculator here works for two different situations and there is a separate calculator for both the options. The first one can be used when you have steady flow of cash. It requires you to input your initial investment, annual cash flow, increase or decrease percentage per year, discount rate percentage and the number of years.
Hit the calculate button and the calculator will show you the complete payback period, discounted payback period, and the annual return for cash flow. Besides, there is a yearly tabular representation of your cash flow, net cash flow, discounted cash flow and net discounted cash flow.
The second option that this payback period calculator gives you is the one that can be used with irregular cash flow. The calculator requires you to enter the initial investment and the discount rate percentage besides your cash flow for up to 10 years. The calculator tells you whether or not your investment will be paid back in the given number of years for which you have entered the cash flow. Besides, it tells you what the average payback will be for the number of years you have entered the cash flow for. It also gives you insights into how much time it will take for the investment to be paid back if things continue that way.
This payback period calculator for irregular cash flows also considers discounted payback and tells you whether or not the investment will be paid back in the given number of years according to the discount rate that you have provided. It also tells you the average yearly discounted payback amount for first couple of years. And, the calculator also tells you the period for discounted payback if it continues the same way. Finally, there is same tabular representation as with the first option for the number of years you have entered the cash flow for.
So, use this payback period calculator to determine your investments' payback time both with steady cash flow and irregular cash flow. It gives you detailed insights into how your investments will pay off.