Payback Period Calculator
Payback Period Calculator
A small bakery considering the purchase of a new industrial oven costing $50,000. The owner estimates that this oven will increase their daily profits by $100. To calculate the payback period, we divide the initial investment by the additional daily profit:
$50,000 / $100 per day = 500 daysIn this case, the payback period is approximately 1.37 years (500 days / 365 days per year).
Payback Period Calculation Chart
| Year | Initial Investment | Annual Cash Flow | Cumulative Cash Flow | Remaining Balance |
|---|---|---|---|---|
| 0 | $100,000 | – | – | $100,000 |
| 1 | – | $30,000 | $30,000 | $70,000 |
| 2 | – | $35,000 | $65,000 | $35,000 |
| 3 | – | $40,000 | $105,000 | ($5,000) |
Payback Period Formula
The Payback Period Formula is:
Payback Period = Initial Investment / Annual Cash FlowThis formula assumes constant annual cash flows.
Payback Period = $50,000 / ($100 * 365) = 1.37 yearsHow to calculate dynamic payback period?
Calculating a dynamic payback period involves tracking cumulative cash flows over time until they equal or surpass the initial investment. Let’s consider an example:
A tech startup invests $200,000 in a new product development. The projected cash flows are:
- Year 1: $60,000
- Year 2: $80,000
- Year 3: $90,000
- Year 4: $100,000
To find the dynamic payback period:
- Sum the cash flows until they exceed the initial investment.
- Interpolate to find the exact point within the year when payback occurs.
In this case, the cumulative cash flow exceeds $200,000 in Year 3. To find the exact payback point:
Remaining balance at start of Year 3 = $200,000 – ($60,000 + $80,000) = $60,000
Fraction of Year 3 needed = $60,000 / $90,000 = 0.667
The dynamic payback period is 2.667 years or approximately 2 years and 8 months.