TUNTON Private credit · Monterrey
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Tool

Payback period

Calculate how long it takes to recover your investment from a constant annual cash flow: in a simple version and discounting the time value of money.

Your opportunity cost; set 0 to ignore it.
Simple payback
—
Without accounting for the time value of money
Discounted payback—
Read—

Assumptions & method

  • Simple: investment ÷ annual cash flow. Discounted: cash flows brought to present value are accumulated until they cover the investment (interpolating the final year).
  • Constant annual cash flow; if your cash flows vary year to year, use the IRR as the primary measure.
  • The discounted payback is always longer than the simple one: recovering 'in today's pesos' takes more time.
  • Payback ignores everything that happens after you recover: complement it with IRR or NPV before deciding.
FAQ

The essentials, in brief

What is payback good for?
As a quick liquidity-risk filter: how long your money is exposed. Projects with a long payback demand more confidence in the far-out projections.
Why calculate the discounted payback?
Because $250,000 in year 6 is worth less than in year 1. Simple payback ignores that and makes every project look better; the discounted version corrects the illusion.
What payback is acceptable?
It depends on the risk of the cash flow: stable contractual flows tolerate long horizons; volatile businesses require short ones. Rule of thumb: if the discounted payback approaches the useful life of the project, there is almost no margin for error.
Next step

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