Startup & fundraising
Payback Period
Formula reviewed by Tahir Asif, CMA
How long it takes a project’s cash flows to return its initial cost.
Payback period is the point at which cumulative cash flow from a project turns positive, so the outlay has been recovered. A project costing $500,000 that returns $145,000 a year pays back in 3.45 years. It is measured in the same units as the cash flow schedule, usually years.
Simple payback ignores the time value of money and everything that happens after the payback point. Discounted payback fixes the first issue by discounting each year’s cash flow before adding it up, and is always longer than simple payback for a project with a positive discount rate.
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