Payback Calculator - Simple and Discounted
Understand the concept of simple and discounted Payback. Learn to calculate the time needed to recover the initial investment in projects and companies.
What is the purpose?
The objective of the Payback Calculator is to calculate the time needed for the cash inflows of a project or investment to equal the value of the initial investment, determining when the project will begin to generate profit.
Formula Used
Payback calculation depends on whether cash flows are constant or variable:
- Constant Cash Flows:
Payback Simples = Investimento InicialFluxo de Caixa Anual
- Variable Cash Flows:
- The calculation accumulates cash flows year by year until the accumulated value is equal to the initial investment. If it occurs in a split year:
Payback Simples = Ano Anterior + Saldo Não Recuperado no Início do AnoFluxo de Caixa do Ano
- Discounted Payback:
- It uses cash flows discounted by WACC (
i) to consider the time value of money: Fluxo Descontado_t = Fluxo de Caixa_t(1 + i)t
How to interpret the result?
The result indicates in how many years and months the investor will have his capital back. Projects with shorter Payback are preferable, as they present lower risk and greater liquidity.
Practical Examples
- For an investment of
10.000,00 com fluxos de caixa anuais de3,000.00: Payback =10000 ÷ 3000 = 3,33years (3 years and 4 months). - For the same investment, with WACC of 10% per year, the discounted flows would be: Year 1:
2.727,27; Ano 2:2,479.34; Year 3:2.253,94; Ano 4:2,049.04. When accumulating the discounted flows, the discounted payback occurs in approximately 4.16 years (4 years and 2 months).
Usage Tips
- Always compare the Simple Payback with the Discounted Payback, as the latter is more realistic when including the cost of capital.
- Use Payback as an initial screening criterion before applying more complex metrics such as NPV and IRR.
- Make sure estimated cash flows are net of taxes and expenses.
Important Observations
Simple Payback ignores the time value of money. Additionally, both versions of payback ignore cash flows received after the payback period, which may underestimate the total long-term profitability of a project.