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What payback period means

Payback period is the amount of time it takes for a project's cumulative cash flows to recover the initial investment — the point at which you've gotten your original money back, before counting anything the project earns afterward. It's the simplest capital-budgeting screen there is: shorter payback means your capital is tied up for less time and exposed to less uncertainty about the more distant future.

This calculator computes the undiscounted version — it does not adjust for the time value of money the way NPV does — which is exactly why it's used as a quick first-pass filter rather than a final investment decision.

How to calculate it

1. Start with the initial investment as a negative cash flow at period 0.
2. Add each period's cash flow to a running (cumulative) total, one period at a time.
3. Find the period where the cumulative total crosses from negative to non-negative. The payback period is the number of full periods completed before that, plus the fraction of the crossing period needed to close the remaining gap — found by dividing the still-negative balance at the start of that period by that period's cash flow.

• Payback period stops the moment the investment is recovered — it says nothing about how much value the project creates afterward.
• If cumulative cash flow never turns non-negative across the cash flows you provide, payback is undefined ("not recovered") at that horizon.

A worked example

A project needs €5,000 upfront and returns €2,000 at the end of each of the next three years. Cumulative cash flow: −€5,000 after period 0, −€3,000 after year one, −€1,000 after year two, and €1,000 after year three — it crosses from negative to positive during year three. The remaining gap entering year three was €1,000, out of that year's €2,000 cash flow, so the crossing happens 1,000 ÷ 2,000 = 0.5 of the way through the year. Payback period = 2 full years + 0.5 = 2.5 years.

Limitations to know

Payback period ignores every cash flow that arrives after the payback point entirely, so two projects with identical payback periods can have very different total returns. It also ignores the time value of money — a euro in year one and a euro in year three count equally — which is why it's best paired with NPV or IRR rather than used alone for a final go/no-go decision.