Calculate payback period in years and months — simple and discounted — to determine how long until an investment breaks even and starts generating net returns.
The payback period is the time required for an investment to generate cash flows
sufficient to recover its initial cost. It's one of the most widely used capital
budgeting metrics because it directly answers: "When do I get my money back?"
Simple payback period formula
Payback Period (years) = Initial Investment / Annual Net Cash Flow
At $200k investment and $80k annual net cash flow: 200k / 80k = 2.5 years.
Discounted payback period
The discounted payback period accounts for the time value of money by
discounting each year's cash flow:
PV of Year N Cash Flow = Annual Cash Flow / (1 + Discount Rate) ^ N
The discounted payback period is always longer than the simple payback period.
At 10% discount rate, a $200k investment with $80k/year simple payback of 2.5 years
becomes approximately 3.1 years discounted.
Payback period benchmarks
Payback Period
Assessment
< 6 months
Exceptional — rare, typically software/SaaS
6–12 months
Excellent — fast return on capital
1–2 years
Good — standard for marketing investments
2–4 years
Acceptable — typical for capital equipment
> 4 years
Long — requires stable, predictable cash flows
Limitations of payback period
Payback period ignores cash flows after the break-even point. A $200k investment
with a 2-year payback that then generates $100k/year for 8 more years is far
superior to one that generates exactly $80k/year — but they show identical
payback periods.
Use payback period alongside ROI and NPV for complete capital budgeting analysis.
Frequently asked questions
What does this calculator do?
Calculate simple and discounted payback period from initial investment and annual
net cash flows, plus ROI at the end of your analysis period.
Payback Period vs ROI: Which Investment Metric Should You Use?
Payback period measures when you break even. ROI measures total return. Learn when to use each metric and how they complement each other for capital decisions.
Both payback period and ROI are investment evaluation metrics — but they answer
different questions and have different blind spots.
Payback period: "When do I get my money back?"
Payback Period = Investment / Annual Net Cash Flow
Payback period focuses entirely on the break-even point. It's simple, intuitive,
and useful for liquidity risk assessment — how long until your capital is no
longer at risk.
Weakness: Ignores all cash flows after break-even. A $100k investment that
pays back in 1 year and then generates nothing has the same payback as one
that generates $100k/year for 10 more years.
ROI: "What's the total return?"
ROI = (Total Net Returns − Investment) / Investment × 100
ROI captures the total value of the investment over the entire period, not
just when it breaks even.
Weakness: Doesn't account for time value of money or liquidity risk.
When to use each
Payback period: Filtering out high-risk investments; cash flow planning
ROI: Comparing overall investment efficiency
Both together: Complete capital allocation decisions
Discounted Payback Period: Formula, Example, and When to Use It
The discounted payback period accounts for the time value of money. Learn the formula, a worked example, and why it matters for long-term investment decisions.
The discounted payback period adjusts for the time value of money: a dollar received
3 years from now is worth less than a dollar today. This makes the discounted version
more conservative — and more accurate for long-horizon investments.
The formula
For each year, discount the cash flow:
PV of Year N = Annual Cash Flow / (1 + Discount Rate)^N
Then accumulate discounted cash flows until they exceed the initial investment.
Break-even occurs partway through year 3 (at ~$198k, just under $200k) — so
discounted payback ≈ 3.02 years vs 2.5 years simple.
When to use discounted payback
Use discounted payback for:
- Any investment with a payback period over 2 years
- High-cost capital investments where inflation matters
- Decisions where the cost of capital is meaningful (> 5%)
For quick marketing investment decisions, simple payback is usually sufficient.
Payback Period for SaaS Investments: CAC Payback Explained
In SaaS, payback period usually means CAC payback — how many months to recover customer acquisition cost. Learn benchmarks and how to calculate yours.
In SaaS, "payback period" almost always refers to CAC payback period —
the number of months to recover the cost of acquiring a customer from that
customer's gross margin contribution.
At CAC of $2,400, ARPU of $200/month, and 75% gross margin:
- Monthly gross profit per customer = $200 × 75% = $150
- CAC Payback = $2,400 / $150 = 16 months
Benchmarks
CAC Payback
Assessment
< 6 months
Exceptional — product-led, low-touch
6–12 months
Excellent — efficient sales-led
12–18 months
Good — typical Series A SaaS
18–24 months
Marginal — improve before scaling
> 24 months
Concerning — CAC recovery takes too long
Why it matters for SaaS
A 24-month CAC payback means you're funding 2 years of customer acquisition
costs before generating a profit on each customer. At 5% monthly churn,
~70% of customers will have churned before you break even.
Reducing CAC payback below 12 months dramatically improves unit economics
and reduces the capital intensity of SaaS growth.