Returns and scenarios Updated November 2026

Payback period

Payback period is the time it takes cumulative cash inflows to equal the initial investment. Payback = full years before recovery + (unrecovered amount at the start of the recovery year / cash flow in that year). Discounted payback uses present values instead of raw cash flows.

Syntax

Payback = years before recovery + unrecovered / cash flow in recovery year

Examples

Investment -1,000; cash flows 500, 400, 300, 200
Cumulative: -500, -100, +200, +400

Result: 2 + 100 / 300 = 2.33 years

Discounted at 10%: PVs 454.55, 330.58, 225.39, 136.60
Cumulative: -545.45, -214.88, +10.52

Result: 2 + 214.88 / 225.39 = 2.95 years

Excel with cumulative flows in C5:F5 and cash flows in C4:F4
=COUNTIF(C5:F5,"<0") + -INDEX(C5:F5,COUNTIF(C5:F5,"<0")) / INDEX(C4:F4,COUNTIF(C5:F5,"<0")+1)

Result: 2.33

Common mistakes

Rounding to whole years when the recovery happens mid-year; use the fraction.
Ignoring the time value of money and cash flows after payback: payback is a liquidity measure, not a return measure, so pair it with NPV or IRR.
Including the initial investment as a year 1 flow, which shifts payback by a year.

Practice Payback period

These drills check your answer on live data, free, no account needed.

Payback periodFill the cumulative cash flow in row 6 (a running total from year 0), then the payback period in B8: the full years before the cumulative total turns positive plus the fraction of the next year needed to recover the rest.
NPV, IRR and profitability indexThe project costs the year 0 amount in B5 and returns cash in years 1 to 5. Find the NPV at the rate in B2 (B7, using NPV), the IRR (B8, using IRR) and the profitability index (B9: present value of the inflows divided by the initial cost).

Questions

What is a good payback period?

It depends on the asset life and risk: SaaS customer acquisition targets under 12 to 18 months; capital projects often accept 3 to 5 years.

Payback or NPV, which should decide?

NPV, because it values every cash flow at the cost of capital. Payback is a useful screen for risk and liquidity but ignores everything after the cutoff.

NPV in ExcelExcel NPV discounts every value one period, so the time zero investment goes outside the function: =NPV(rate, cash flows) + initial. Exact examples, errors.
IRR in ExcelIRR is the discount rate at which NPV equals zero. How =IRR(values) works in Excel, exact worked examples, the guess argument, MIRR and fixing #NUM! errors.
CAC and LTVCAC = sales and marketing spend / new customers; LTV = ARPU x gross margin / churn rate. Examples giving LTV to CAC of 4.8 and a 4.2 month payback, errors.
Discount factorA discount factor converts a future cash flow into present value: DF = 1 / (1 + r)^t. Worked examples, the Excel formula with absolute references, mid-year.