Payback or discounted cash flow for an investment?

Payback omits timing and later years. Use the same assumptions for present value and a sensitivity check.

6 August 2022Updated 23 September 2026

Short answer

Use payback as an initial screen, not the sole decision rule. For each option, list annual net cash flows, service life, maintenance and residual value on the same assumptions. NPV = negative initial investment + each year’s net flow / (1 + discount rate)^year. Set the rate with your finance team and test the result by varying key inputs.

Simple payback shows when accumulated savings cover the initial investment. On its own, it does not represent later cash flows or the time value of money.

Build one table for both options

Enter initial investment, net savings or costs by year, maintenance, service life and any residual value. NPV discounts each period’s net flow to today: NPV = negative initial investment + sum [net flow_t / (1 + r)^t]. Here r is the discount rate agreed with the business and t is the period number.

Compare new equipment with the current method at the same service level. Take inputs such as loss, washing, energy, maintenance and trip count from your own records. For reusable packaging comparisons, use cycles and end-of-life assumptions can also change the result.

Alongside the base case, calculate scenarios with lower utilisation, higher maintenance or shorter service life. Identify which input changes the decision and list sources and assumptions in the table.