Calculate payback with equal annual inflows
Find how long a project takes to recover its initial investment when annual net cash inflows are equal.
Section 4.4 · Investment appraisal
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. This topic covers future net cash flows, payback, ARR, NPV, IRR and supported investment decisions. Discounted payback and questions involving a residual value at the end of a project are excluded by Cambridge. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use AS Topics 1.5–1.6 for profit, depreciation and financial analysis, and Topic 2.1 for contribution. Keep accounting profit, project cash flow and the time value of money distinct.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A project costs $40,000 and returns $10,000 net cash each year. What is payback?
What you will learn
- Calculate payback for equal annual flows
- Apply the stated maximum period
- Interpret recovery time as a liquidity measure
Divide the investment by annual net cash inflow
When equal net cash inflows arrive at each year end, payback period = initial investment ÷ annual net cash inflow. State the answer in years and compare it with the organisation's maximum period.
This formula assumes equal inflows. If annual cash flows differ, accumulate them period by period instead.
Use the rule as one decision input
Shorter payback may reduce the time cash is tied up and exposure to distant forecasts. It does not measure all profit or value after the recovery point.
A maximum period is a management rule, not a universal threshold. Compare project scale, later cash flows, risk and strategic effects too.
Pause and explain
A project's payback is 3.5 years against a 4-year maximum. What does this rule indicate?
Worked example
An investment costs $96,000 and yields $32,000 net cash each year. Calculate payback.
Show the worked solution
- Divide the initial outflow by the annual inflow.
- $96,000 ÷ $32,000 = 3.
- State the result in years.
Answer Payback is 3 years.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A machine costs $150,000 and returns $50,000 net cash each year. Calculate payback.
Give me a hint
Use the equal-inflow formula.
Compare my reasoning
- Initial investment = $150,000.
- Annual net inflow = $50,000.
- Payback = 150,000 ÷ 50,000 = 3 years.
Payback is 3 years.
Look for these in your work
- Investment identified
- Annual inflow used
- Years stated
Project A costs $84,000 and yields $28,000 a year. Project B costs $110,000 and yields $44,000 a year. Calculate both paybacks.
Give me a hint
Divide each investment by its own annual net cash flow.
Compare my reasoning
- A: 84,000 ÷ 28,000 = 3 years.
- B: 110,000 ÷ 44,000 = 2.5 years.
- B recovers sooner under this measure.
A pays back in 3 years; B in 2.5 years.
Look for these in your work
- A calculated
- B calculated
- Comparison interpreted
A charity with limited reserves wants to compare how quickly two projects return their initial cash. Which measure addresses that question?
Give me a hint
Choose the method that measures time to recover the outflow.
Compare my reasoning
- Calculate payback from each project's future net cash flows.
- Use the same timing convention for both.
- Explain that later receipts are omitted after recovery.
Payback compares recovery speed; follow it with checks of later cash flows, risk and service outcomes.
Look for these in your work
- Measure fits question
- Basis consistent
- Limitation stated
Common mistakes
- Using accounting profit instead of net cash flow
- Forgetting the time unit
- Treating a payback rule as a complete decision
What can you explain now?
For equal annual net cash inflows, payback is…
Compare with the explanation
Initial investment ÷ annual net cash inflow
The number of periods required is the investment divided by cash recovered each period.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
What does payback measure, and what does it leave out?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.