What is the payback period formula?

Payback period = what it costs up front ÷ the extra cash it brings in each period. A $48,000 oven that adds $2,250 a month of cash after its own running costs pays back in 48,000 ÷ 2,250 = 21.3 months, about a year and nine months. If the cash it brings in changes from year to year, add it up year by year until the total reaches the cost instead.

What counts as the cash it brings in?

Only what changes because of the purchase: the extra gross profit on new sales (sales less what the goods cost you, not the whole sale), or the costs it saves, such as wages, rent, fuel or a subcontractor. Take off its own running costs (power, servicing, insurance, licences). Leave out costs you pay either way, and leave out depreciation, which is not cash.

What is a good payback period?

Shorter than the thing lasts, with room to spare. Many small business owners look for two to three years on equipment, because forecasts of extra sales are usually optimistic and anything further out is a guess. A purchase that only pays back in its final year leaves no room for error.

What is discounted payback?

Payback counting the interest the money costs. If you borrow at 9%, or could earn interest on the cash instead, each month of gain is worth a little less than the money you spend today, so payback takes longer: 23 months instead of 21 in the bakery example. If the interest on the cost is more than it brings in each month, it never pays back.

No, the calculator works before tax. The extra profit is taxed, and you may be able to deduct the purchase over time (or at once, under schemes such as the UK annual investment allowance or Australia's instant asset write-off when it applies). Ask your accountant how the purchase is treated, then take the tax off the monthly gain. Leave out GST or VAT you can claim back.

Where do I find the figures in Xero?

The cost is on the supplier's quote or bill. For the gain, the Profit and Loss by month shows the gross margin on the sales the purchase would add, and the expense lines it would cut. After you buy, compare the same lines month by month to see if the gain turned up.

Are my figures stored or sent anywhere?

No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

Payback period calculator: when will it pay for itself?

The payback period formula

Payback period = cost up front ÷ extra cash it brings in each month. The cost is everything you pay to get it working: the price, delivery, installation and training, without GST or VAT you claim back. The extra cash is only what changes because you bought it: the extra gross profit on new sales, or the costs it saves, less its own running costs. That is the incremental cash flow of the decision, and getting it right matters more than the division.

Count gross profit, not sales. If a new machine lets you sell $5,000 more a month at a 52% gross margin, it adds $2,600 a month, not $5,000, because the ingredients or materials still cost you (the margin and markup calculator works out your margin). Leave out depreciation: it spreads the cost on the Profit and Loss, but the cash went out on the day you paid.

A worked example: a bakery's new oven

An Auckland bakery is quoted $48,000 without GST for a deck oven, installed. It lets them take on a café wholesale round worth about $5,000 a month of extra sales at a 52% gross margin, so $2,600 a month of gross profit. The oven adds about $350 a month in power and servicing. They would borrow at 9%, the supplier says it lasts at least 8 years, and the owners want anything they buy to pay back within two years. (Made-up figures to show the arithmetic.)

	Amount
Extra cash a month: $2,600 − $350	$2,250
Payback: $48,000 ÷ $2,250	21.3 months (about 1 year 9 months)
Return a year: $2,250 × 12 ÷ $48,000	56%
Payback counting 9% interest	23 months
If the round brings in 25% less: $48,000 ÷ ($1,950 − $350)	30 months
Over 8 years: $2,250 × 96 − $48,000	$168,000 better off

On the expected figures the oven clears the two-year target with a few months to spare. Counting interest it takes 23 months, still inside. But if the wholesale round brings in a quarter less than hoped it takes 30 months, so the decision rests on how firm the café orders are. Before signing a loan for it, the DSCR calculator shows whether the business's cash covers the repayments, and the break-even calculator shows the sales the whole business needs once the new costs are in. Press "Load the worked example" above to see it in the calculator.

Before you buy

Test the gain, not the price. Quotes are precise and forecasts are not. Run the calculator again with the gain 25% lower; if that payback is still acceptable, the decision is safe.
Check it lasts longer than it takes to pay back, with room to spare. Something that pays back in its last year leaves nothing for repairs or a slow start.
Count the cash, not just the payback. Paying $48,000 at once can leave the bank thin even when the purchase is a good one. The cash runway calculator shows how many months of costs the bank covers after the payment, and a cash flow loan is rarely the right way to fund equipment.
Payback is a filter, not a valuation. It ignores cash after the payback date. To compare two options that last different lengths of time, a discounted cash flow counts every year.

Checking the gain turned up, in Xero

Before: run the Profit and Loss by month for the last 12 months and note the gross margin and the cost lines the purchase should change.
After: run the same report each month. The extra sales should show at your usual margin, and the saved costs should fall. If you use tracking categories, tag the new work so the profit by job is visible on its own.
Add up the gain so far against the cost. That running total is your real payback, and it tells you early if the forecast was too hopeful.

Questions

What is the payback period formula?: Payback period = what it costs up front ÷ the extra cash it brings in each period. A $48,000 oven that adds $2,250 a month of cash after its own running costs pays back in 48,000 ÷ 2,250 = 21.3 months, about a year and nine months. If the cash it brings in changes from year to year, add it up year by year until the total reaches the cost instead.
What counts as the cash it brings in?: Only what changes because of the purchase: the extra gross profit on new sales (sales less what the goods cost you, not the whole sale), or the costs it saves, such as wages, rent, fuel or a subcontractor. Take off its own running costs (power, servicing, insurance, licences). Leave out costs you pay either way, and leave out depreciation, which is not cash.
What is a good payback period?: Shorter than the thing lasts, with room to spare. Many small business owners look for two to three years on equipment, because forecasts of extra sales are usually optimistic and anything further out is a guess. A purchase that only pays back in its final year leaves no room for error.
What is discounted payback?: Payback counting the interest the money costs. If you borrow at 9%, or could earn interest on the cash instead, each month of gain is worth a little less than the money you spend today, so payback takes longer: 23 months instead of 21 in the bakery example. If the interest on the cost is more than it brings in each month, it never pays back.
Does it include tax?: No, the calculator works before tax. The extra profit is taxed, and you may be able to deduct the purchase over time (or at once, under schemes such as the UK annual investment allowance or Australia's instant asset write-off when it applies). Ask your accountant how the purchase is treated, then take the tax off the monthly gain. Leave out GST or VAT you can claim back.
Where do I find the figures in Xero?: The cost is on the supplier's quote or bill. For the gain, the Profit and Loss by month shows the gross margin on the sales the purchase would add, and the expense lines it would cut. After you buy, compare the same lines month by month to see if the gain turned up.
Are my figures stored or sent anywhere?: No. The calculation runs in your browser. Nothing you type is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

This calculator gives an estimate from the figures you enter. It is not financial or tax advice. Xero is a trademark of Xero Limited. This tool and ReportPilot are independent and are not made or endorsed by Xero.

Payback period calculator: how long until it pays for itself?

Your payback period