Breakdown
How it works
Simple payback divides cost by annual saving. Discounted payback recognises that savings in year 8 are worth less than savings in year 1, so it is always longer. Payback ignores everything after the payback point — use NPV for a full view.
Formula
Simple payback = cost ÷ annual inflow (adjusted for growth)
Discounted: cumulative Σ inflow ÷ (1 + r)ᵗ reaches cost
Worked example
50,000 investment saving 14,000 a year: simple payback 3.6 years; discounted at 8% 4.2 years; ROI 28% a year.
Frequently asked questions
What is a good payback period?
Under 3 years is attractive for business equipment; 5–8 years is typical for solar panels and insulation; anything beyond half the asset's life is weak.
Payback or NPV?
Payback is a quick risk screen (how long is my money exposed?). NPV measures value created. Use payback to filter, NPV to decide.