What payback period tells you — and what it ignores
Payback period answers one question: how long until an investment returns your initial outlay in cash? It is a quick screening tool, not a full profitability measure — it ignores any cash flows that happen after the breakeven point and (in its simple form) ignores the time value of money entirely.
Simple vs. discounted payback
Simple payback adds up raw future cash flows until they cover the initial investment. Discounted payback first reduces each future cash flow by a discount rate to reflect that a dollar received later is worth less than a dollar today — so the discounted payback period is always the same or longer than the simple one.
Simple, cash flow series, and discounted modes
Simple mode assumes one identical cash flow every period. Cash flow series mode lets you enter a different cash flow for each year, which matters when returns ramp up or drop off over time. Discounted mode applies your chosen discount rate on top of either cash flow pattern.
Use it alongside NPV and IRR, not alone
Because payback period ignores cash flows after breakeven, two projects with the same payback period can have very different total returns. Use payback as a quick liquidity/risk screen, then confirm the decision with Net Present Value or Internal Rate of Return, which account for the full cash flow timeline.
What this calculator does not cover
This models cash flow timing only — it does not account for financing costs, taxes, inflation adjustments beyond the discount rate you enter, or risk-adjusted required rates of return.