Should I choose the project with the shorter payback?

Not on that basis alone. Payback ignores everything after the payback date, so a project that recovers quickly and then stops can be worth far less than a slower one that keeps earning. Compare net present value.

Why is the discounted payback so much longer?

Because the later years, which are the ones doing the recovering, are discounted hardest. At ten percent, cash in year five is worth about sixty-two percent of its face value.

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Payback Period Calculator

How long an investment takes to pay for itself, both undiscounted and discounted. The two differ by more than people expect, and the discounted figure is the honest one because a rupee arriving in year six is not a rupee today.

Also called: payback period, investment payback calculator.

Payback period

3.57

3.57 years to recover 25,00,000, or 4.65 years once the cash is discounted at 10%. Discounting adds 1.08 years, because the later years doing the recovering are the ones discounted hardest. At 10% a rupee in year five is worth 62 paise today. Payback stops counting at the payback date and ignores the 4.4 years of cash after it, which is usually where the value sits. The net present value of 1234448.34 counts all of it and is the number that should decide.

Discounted payback

4.65

Total inflow over the project life

₹56,00,000

Net gain over the life

₹31,00,000

Net present value

₹12,34,448

Return on investment

124%

Years earning after payback

4.43

On the two figures

Discounting adds 1.08 years, because the later years doing the recovering are the ones discounted hardest. At 10% a rupee in year five is worth 62 paise today.

What payback ignores

Payback stops counting at the payback date and ignores the 4.4 years of cash after it, which is usually where the value sits. The net present value of 1234448.34 counts all of it and is the number that should decide.

How this is calculated

An estimate, not an offer or a guarantee. Projected returns assume the rate you entered holds for the whole term, which no market does.

Cumulative cash position

Hover or drag for values

Cumulative position

Recovery year by year

Year	Cash in	Cumulative position	Discounted	Discounted position
Year 1	₹7,00,000	-₹18,00,000	₹6,36,364	-₹18,63,636
Year 2	₹7,00,000	-₹11,00,000	₹5,78,512	-₹12,85,124
Year 3	₹7,00,000	-₹4,00,000	₹5,25,920	-₹7,59,204
Year 4	₹7,00,000	₹3,00,000	₹4,78,109	-₹2,81,094
Year 5	₹7,00,000	₹10,00,000	₹4,34,645	₹1,53,551
Year 6	₹7,00,000	₹17,00,000	₹3,95,132	₹5,48,682

Method and background

How this is calculated

Simple payback accumulates the inflows until they cover the outlay. It is popular because it is easy and because it speaks to a real concern, how long capital is at risk, but it treats distant cash as equal to immediate cash and so always flatters. Discounting each year first gives the discounted payback, which at a ten percent rate typically runs a year or more longer. Both measures share a deeper flaw: they stop counting at the payback date and ignore everything after it. A project paying back in three years and then stopping is worse than one paying back in four and running for ten, which is why the net present value is shown alongside and should be the deciding number.

the simple form, which treats a rupee in year six as equal to one today and therefore always flatters the project

I: Initial investment
C: Annual cash inflow

Worked examples

Each of these is asserted on every build. If a change to the engine ever moved one of these answers, the build would fail before the page could print it.

a steady 700,000 a year against 2.5 million

Initial investment: ₹25,00,000
Annual cash inflow: ₹7,00,000
Or uneven yearly inflows
Discount rate: 10%
Project life: 8
Annual growth in the inflow: 0%

Payback period3.57

2.5m / 700k, with the fraction interpolated inside year four

Open this example

discounting pushes it out

Initial investment: ₹25,00,000
Annual cash inflow: ₹7,00,000
Or uneven yearly inflows
Discount rate: 10%
Project life: 8
Annual growth in the inflow: 0%

Payback period3.57

boundary: a full year longer once the later cash is discounted

Open this example

Method and limits

What it assumes

Cash flows arriving at the end of each year, which is the standard convention.

What it deliberately does not model

Payback ignores every cash flow after the payback date, which is where most of the value usually sits.
It is a liquidity measure rather than a profitability one and should not decide between projects on its own.

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Frequently asked questions

Should I choose the project with the shorter payback?: Not on that basis alone. Payback ignores everything after the payback date, so a project that recovers quickly and then stops can be worth far less than a slower one that keeps earning. Compare net present value.
Why is the discounted payback so much longer?: Because the later years, which are the ones doing the recovering, are discounted hardest. At ten percent, cash in year five is worth about sixty-two percent of its face value.