Payback Period

Capital Budgeting
Updated Apr 2026 • Has calculator

The time it takes for a project to recover its initial investment from undiscounted cash flows.

What is Payback Period?

The payback period measures how quickly a project recoups its initial outlay from cumulative undiscounted cash flows. It is the simplest capital budgeting metric and is widely used as a risk screen: a shorter payback reduces exposure to uncertainty. Companies often set a maximum acceptable payback period (a payback cutoff) and reject projects that take too long to break even. The payback period's main weakness is that it ignores the time value of money and disregards all cash flows beyond the payback date. The discounted payback period addresses the first flaw; NPV addresses both.

Formula

Payback = Last Full Year + (Remaining Balance ÷ Next Year's CF)

Worked Example

Worked example — Capital Project — CFA Curriculum Illustration

Same 5-year project

Step 1  Initial investment: −$500,000
Step 2  Cumulative CF after year 1: −$380,000; after year 2: −$230,000; after year 3: −$50,000
Step 3  Year 4 cash flow: $160,000; remaining balance going into year 4: −$50,000
Step 4  Payback = 3 + ($50,000 ÷ $160,000) = 3 + 0.31 = 3.31 years
Step 5  → The project recovers its $500,000 investment in about 3.31 years

Source: CFA Institute — Corporate Finance, 4th ed., Capital Budgeting (2024-01-01)

Calculate Payback Period

Enter comma-separated cash flows starting at t=0. CF₀ must be negative. E.g.: -500000, 120000, 150000, 180000, 160000, 130000

Payback Period

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Not investment advice.

How to Interpret Payback Period

< 1
< 1 Year — extremely fast payback
1 – 3
1–3 Years — short payback; low risk
3 – 5
3–5 Years — medium payback; acceptable
> 5
> 5 Years — long payback; higher uncertainty

📚 Capital Budgeting — Complete the path

  1. NPV
  2. IRR
  3. MIRR
  4. Payback Period
  5. Discounted Payback
  6. Profitability Index
Sources
  1. CFA Institute — Corporate Finance, 4th ed., Capital Budgeting
  2. Brealey, Myers & Allen — Principles of Corporate Finance, 13th ed.
  3. Investopedia — Payback Period