Payback Period Calculator
Estimate the time required to recover the initial investment from annual cash inflows.
Project Inputs (₹)
Total initial capital expenditure (outflow).
The average annual profit/income from the investment.
Payback Period
—
Years
Investment Status
Awaiting calculation…
Total cash flow is typically $150,000 / year.
Understanding the Payback Period Method
The **Payback Period Calculator** is a simple and widely used technique in capital budgeting that focuses solely on liquidity and risk. It measures the time (in years and months) required for an investment’s net cash inflows to equal the initial cash outflow.
Calculation Formula (Equal Annual Cash Flows)
Assuming the cash flow is the same each year, the formula is: $$\text{Payback Period (Years)} = \frac{\text{Initial Investment}}{\text{Annual Net Cash Flow}}$$
Risk and Liquidity Assessment (FAQ)
Why do companies favor projects with a short payback period?
A shorter payback period indicates **lower risk** and **higher liquidity**. The sooner the cash is recovered, the less exposed the company is to future changes in market conditions, technology, or interest rates.
Does this method consider profitability?
**No.** The Payback Period ignores the time value of money (interest/inflation) and all cash flows that occur *after* the recovery period. It’s a quick risk screen, but should be supplemented with tools like the **IRR (Internal Rate of Return)** or **NPV (Net Present Value)** for true profitability analysis.