The payback period is the time it takes a project’s cash flows to return the investment.
If the annual flow is the same every year, divide: investment ÷ annual cash flow. If the flows differ, use the cumulative total.
For example, €150,000 invested with €30,000–60,000 a year pays back in 3.5 years, or 4.5 at a 12% discount rate.
Below: the formulas for simple and discounted payback, a worked example, how to calculate payback in Excel, what a normal payback period is, how payback differs from ROI, NPV and IRR, and where it misleads. The page includes a payback, NPV and IRR calculator.
What the payback period is
The payback period answers a simple question: how many years until the money invested comes back.
Owners and banks like it because it shows risk at a glance — the longer the money is locked in a project, the more can go wrong.
There are two versions:
- simple payback — on the cash flows as they are;
- discounted payback — on the cash flows converted into today’s money at the discount rate. It is always longer than simple payback.
The payback period formula
If the annual flow is the same:
Payback period = Investment / Annual cash flow
€200,000 invested and €50,000 a year — 4 years.
If the flows differ, add them year by year until the cumulative total covers the investment, then add the fraction of the year:
Payback = Years before payback + Unrecovered amount / Cash flow in the payback year
The flow is net cash flow after corporate tax: receipts minus payments, without depreciation, which is not a cash payment.
How to calculate payback: an example
An illustrative project: €150,000 invested, cash flows of €30,000, €40,000, €50,000, €60,000 and €60,000 by year, a 12% discount rate.
| Year | Cash flow | Cumulative | Today’s value (12%) | Cumulative, today’s value |
|---|---|---|---|---|
| 0 | −€150,000 | −€150,000 | −€150,000 | −€150,000 |
| 1 | €30,000 | −€120,000 | €26,786 | −€123,214 |
| 2 | €40,000 | −€80,000 | €31,888 | −€91,327 |
| 3 | €50,000 | −€30,000 | €35,589 | −€55,738 |
| 4 | €60,000 | +€30,000 | €38,131 | −€17,606 |
| 5 | €60,000 | +€90,000 | €34,046 | +€16,439 |
- Simple payback. At the end of year 3, €30,000 is still unrecovered; year 4 brings €60,000: 3 + 30,000 / 60,000 = 3.5 years.
- Discounted payback. At the end of year 4, €17,606 in today’s money is unrecovered; year 5 brings €34,046: 4 + 17,606 / 34,046 ≈ 4.5 years.
The year’s difference is the cost of money: at 12%, the project returns the investment noticeably later than the plain sums suggest.
Payback period calculator
Enter the investment, the rate and the cash flows by year. The calculator shows simple and discounted payback, plus NPV and IRR — the table below shows how the flows accumulate.
If you are assessing the purchase of an existing business — a café, hotel, laundromat or garage — the calculator based on revenue and costs in the sector articles is more convenient, for example in Buying a café or bar in Spain.
Payback period in Excel and Google Sheets
Excel has no built-in payback function — you build it from columns:
- Column B holds the flows by year, with the investment as a negative number in B2.
- Column C holds the cumulative total:
=B2in C2,=C2+B3in C3, and so on. - The first year in which the cumulative total turns positive is the payback year. Payback: the previous year’s number +
−C(previous) / B(payback year). - For discounted payback, add a column with each flow in today’s money —
=B3/(1+rate)^A3, with the year number in column A — and repeat steps 2–3 on it.
What is a normal payback period
There is no single standard — it depends on the risk and on what the owner keeps after payback:
- A small business without property — café, bar, laundromat, garage — usually aims for 3–5 years: equipment ages and the lease may end.
- A business with its building — hotel, campsite — pays back in 10–20 years, and that is normal: the owner keeps the building. Here the return on investment matters more.
- Projects with fast-changing technology need a short payback: in a few years the product may be obsolete.
A very short payback is a warning sign too: if a business “pays for itself in a year”, check revenue against bank statements and tax returns, not the seller’s word.
Payback period and ROI
ROI (return on investment) is the percentage profit the money invested has earned.
ROI = (Return − Investment) / Investment × 100%
In the example, the project brought in €240,000 over five years on €150,000 invested: ROI = 90,000 / 150,000 = 60% over five years, 12% a year on average.
Payback says when the money comes back; ROI says how much it earns over the whole period. Neither accounts for when exactly the money arrived — that takes NPV and IRR.
Payback, NPV and IRR compared
| Measure | What it shows | Accounts for the cost of money | Counts flows after payback |
|---|---|---|---|
| Simple payback | When the investment comes back | No | No |
| Discounted payback | When it comes back, at the rate | Yes | No |
| ROI | Return over the whole period | No | Yes |
| NPV | Value created, in euros | Yes | Yes |
| IRR | Annual return | Yes | Yes |
Where the payback period misleads
- It ignores money after payback. A project that pays back in 3 years and then closes looks better than a 4-year one that then earns for ten years.
- Simple payback ignores the cost of money. For long projects the gap with discounted payback is years.
- It depends on the forecast. Payback is only as accurate as the revenue and costs in the financial model.
- It ignores residual value. A building or a business you can sell does not appear in the payback period.
So payback is a good first filter, but decisions are made on NPV and IRR.
Payback period for a project in Spain
- Flows are calculated after corporate tax at the 2026 rates: 25% standard, 23% for turnover under €10m, 19% on the first €50,000 and 21% above for turnover under €1m, 15% for a new company in its first profitable year and the next.
- VAT is left out of the flows, but the timing gap between collecting and paying VAT affects cash in the first months.
- The investment includes not just the purchase or refit price, but also licences, design, deal taxes and start-up cash.
Frequently asked questions
How do you calculate the payback period?
With an equal annual flow, divide the investment by the annual flow. With uneven flows, add them year by year until the total covers the investment, then add the fraction of the year: the unrecovered amount divided by that year’s flow.
How does discounted payback differ from simple payback?
Discounted payback uses flows converted into today’s money at the discount rate, so it is always longer than simple payback. In the article’s example, 4.5 years against 3.5.
What is a good payback period?
For a small business without property, 3–5 years is the usual guide; for a business with its building, 10–20 years is normal. A very short payback is a reason to check the seller’s figures.
What is the difference between payback period and ROI?
Payback shows when the investment comes back; ROI shows what percentage it earned over the whole period. ROI counts money after payback; the payback period does not.
How do you calculate payback in Excel?
There is no built-in function: add a column with the cumulative total of the flows, find the year it turns positive and add the fraction of the year — the unrecovered amount divided by that year’s flow.
Key points about the payback period
- The payback period is how long the cash flows take to return the investment.
- Simple payback uses the flows as they are; discounted payback uses today’s values and is always longer.
- The norm depends on the business: 3–5 years without property, 10–20 with the building.
- Payback ignores money after payback and residual value.
- Use payback as a first filter and decide on NPV and IRR.
Sources
- Ley 27/2014 del Impuesto sobre Sociedades, art. 29 and transitional provision 44 — BOE.
- Corporate Finance Institute — Payback Period: corporatefinanceinstitute.com; Discounted Payback Period — corporatefinanceinstitute.com.
