# Payback Period Calculation

What is the payback period of an investment? How is it calculated? Read, to know all about it.

Omkar Phatak

Last Updated: Mar 9, 2019

Definition

Time is a variable which needs to be considered in any investment equation. The payback period of an investment is related to this time element. When making an investment as a part of financial management for business purposes, one must know how to calculate the returns on it, as there are many calculations that need to be made.

*The payback period is simply the amount of time required for the cost of investment to be repaid through incoming cash flow.*If an investment is going to bring in more business, then its payback period is the time required to recover its cost, from cash inflows. Only after that period of an investment is over, does it start making actual profits.

Formula

Calculating the period is very simple and all it needs are two parameters. First parameter required is the total cost of investment and the second one is the projected cash inflow per year. When calculating the period for uneven cash flow, take the average yearly cash flow into consideration. Here is the formula that you need.

*Payback Period (In Years) = Total Investment Cost/Yearly Cash Inflow*

A fixed yearly cash flow makes the calculation easier and more accurate.

Example

Consider that you made an investment in the retail business, which cost you about USD 100,000. According to your business forecast, your investment will yield USD 20,000 of return on investment (ROI) per year. What will be the payback period?

Payback Period = USD 100,000/USD 20,000 = 5 Years