Payback Period Calculator (2024)

FAQs

What is a good simple payback period? ›

Most broadly speaking, a good payback period is the shortest payback period possible. It is generally considered “healthy” for a SaaS company to have a payback period of 1 year, although it will vary throughout your company's lifetime as the various factors that contribute to the payback period fluctuate and evolve.

First, input the initial investment into a cell (e.g., A3). Then, enter the annual cash flow into another (e.g., A4). To calculate the payback period, enter the following formula in an empty cell: "=A3/A4" as the payback period is calculated by dividing the initial investment by the annual cash inflow.

What is Payback Time? The Rule #1 Payback Time calculator estimates the number of years it would take the earnings of the company to cover the cost of the stock price. It gives you a sense, as an owner, of how long it would take you to get your investment back, based on the company's historical earnings stream.

The payback period is calculated by dividing the amount of the investment by the annual cash flow. Account and fund managers use the payback period to determine whether to go through with an investment. One of the downsides of the payback period is that it disregards the time value of money.

12 months or less is generally considered a good CAC payback period. However, this number varies significantly by industry, company size, and annual contract value (ACV), so it's important to be aware of peer benchmarks. Let's take a look at some below.

The shortest payback period is generally considered to be the most acceptable. This is a particularly good rule to follow when a company is deciding between one or more projects or investments. The reason being, the longer the money is tied up, the less opportunity there is to invest it elsewhere.

Attractive NPVs, payback periods, and SIRs typically fall within certain ranges, which should always be positive. However, negative values are possible in a couple of instances and do not necessarily indicate an error.

Discounted Payback Period Formula

First, we must discount (i.e., bring to the present value) the net cash flows that will occur during each year of the project. Second, we must subtract the discounted cash flows from the initial cost figure in order to obtain the discounted payback period.

The discounted payback period is a capital budgeting procedure used to determine the profitability of a project. A discounted payback period gives the number of years it takes to break even from undertaking the initial expenditure, by discounting future cash flows and recognizing the time value of money.

It's used to calculate the doubling time or growth rate of investment or business metrics. This helps accountants to predict how long it will take for a value to double. The rule of 69 is simple: divide 69 by the growth rate percentage. It will then tell you how many periods it'll take for the value to double.

What is the formula for cash flow? ›

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure.

ROI (Return on Investment) estimates the potential return of a business, product, or service. Payback, on the other hand, is related to the return time of an investment, that is, the time it will take for the profit to equal the invested amount.

Cash flow after taxes are used to compute the payback period. Depreciation is not considered for calculating cash flows (i.e. depreciation will not be deducted)

Additionally, a shorter payback period can reduce the risk of the investment since the business is able to recoup its costs more quickly.

Chances are you've heard people ask, “How long until we make our money back?” And that's exactly what the method shows you, says Knight: “The time it takes for the cash flow from the project to return the original investment.” The shorter the payback period, the better.