How this number is made
Payback is how many years of net cash it takes to get your cost back. It is a screen for “how long is my money tied up,” not a reason to pick the shorter project if the longer one earns for years afterward.
- Cost is what you spend up front. A loan does not shrink this number. The cash is still committed.
- Net cash per year is inflows minus the costs of running the thing. Do not use revenue if you still have to buy stock.
- If the cash flow rises over time, this straight division is too rough. Average only if you accept that.
Formula
Payback in years = cost ÷ net cash per year.
Worked example
A $12,000 machine that returns $3,000 a year after running costs pays back in 4 years. That is $250 a month. Year five is the first year the cost is behind you, and this page stops caring what happens then.
Questions
Why isn’t this the investment-return page?
That page turns a starting value and an ending value into a compound rate. Payback does not need an ending value. It only asks when the cash comes back.
Should I discount the later years?
A strict version does, because cash later is worth less. This page does not. If the payback is many years, treat it as a ceiling, not a precise date.