Payback, NPV, IRR and break-even with development cost
Simple payback, discounting and net present value, IRR as a check value, and how many units recover a one-time development cost.
By Manoj Sahukar· October 2026 · 11 min read
How numbers are rounded on these pages. Calculations are done at full precision and rounded only at the end, half up. Rupee amounts are rounded to the nearest rupee unless shown with paise, in which case to the nearest paisa. Percentages are shown to two decimal places, months to one decimal place, years and ratios (such as LTV : CAC) to two, and discount factors to four. Discounting assumes cash flows at the end of each year, compounded yearly. IRR has no exact formula: it is found by repeated trial and shown to two decimal places as a check value. Break-even quantities are rounded up to the next whole unit. All examples and quiz questions are Hypothetical: they show the method, not real prices or rates.
Simple payback, NPV and IRR
A new product usually needs money now (design, tooling, launch) and pays back over several years. Three standard measures help you judge it.
Simple payback: how many years until the cash coming in equals the money put in. Easy, but it ignores the timing of money and anything after payback.
Net present value (NPV): a rupee next year is worth less than a rupee today, because today's rupee could earn a return meanwhile. So each future year's cash is discounted back to today at your required rate of return (the return you need, often your cost of capital), and the investment is subtracted. A positive NPV means the project earns more than that rate.
Internal rate of return (IRR): the discount rate at which NPV is exactly zero, in effect the project's own yearly return. There is no simple formula; it is found by trial. Accept if IRR is above your required rate. Here IRR is shown only as a check value. When projects differ in size or timing, rely on NPV.
Internal rate of returnIRR = the rate r at which NPV = 0 (found by trial)
Terms used
Cash flow
Money actually received or paid in a period (not profit after depreciation).
Required rate of return
The minimum yearly return you need from the project; also called the discount rate or hurdle rate.
Discount factor
What ₹1 received in year t is worth today at rate r.
Present value (PV)
A future amount converted into today's money.
Net present value (NPV)
Sum of the present values of all cash flows, including the initial investment as a negative.
Internal rate of return (IRR)
The discount rate that makes NPV zero.
Worked examples
HypotheticalBasicSimple payback
A new product needs ₹20,00,000 for design, tooling and launch, and is expected to bring ₹6,00,000 of net cash a year for 5 years.
Payback = ₹20,00,000 ÷ ₹6,00,000 = 3.33 years
HypotheticalIntermediateNPV at a 12% required return
Same project; discount each year's cash at 12%.
Year 1: ₹6,00,000 ÷ 1.121 = ₹5,35,714.29
Year 2: ₹6,00,000 ÷ 1.122 = ₹4,78,316.33
Year 3: ₹6,00,000 ÷ 1.123 = ₹4,27,068.15
Year 4: ₹6,00,000 ÷ 1.124 = ₹3,81,310.85
Year 5: ₹6,00,000 ÷ 1.125 = ₹3,40,456.11
Total present value = ₹21,62,865.72; NPV = ₹21,62,865.72 − ₹20,00,000 = ₹1,62,865.72
Positive, so the project earns more than 12% a year. (The total adds the unrounded values, so it can differ by a paisa from adding the rounded lines.)
HypotheticalAdvancedIRR as a check value
Try higher rates until NPV crosses zero.
NPV at 15% = ₹11,293.06; at 16% = −₹35,423.81
So IRR lies between 15% and 16%; by repeated trial it is about 15.24%
IRR 15.24% is above the 12% required return, which agrees with the positive NPV.
Break-even for a new product, including development cost
A new product carries one-time costs before the first sale: design, prototypes, tooling, testing, certification, launch. These are fixed costs that must be recovered from contribution, on top of the ongoing fixed costs of making and selling the product.
Work out how many units recover the one-time cost, how long that takes at the expected sales rate, and what price is needed to recover everything within a target volume. This is the same break-even logic as on the trader break-even page, with the development cost added to fixed costs.
The standard formulas
Units to recover one-time cost = One-time development costContribution per unit
Including running fixed costsBreak-even units for a period = One-time cost + Fixed costs for the periodContribution per unit
Time to recoverMonths to recover = One-time costMonthly contribution − Monthly fixed costs
Price for a target volumePrice needed = Variable cost per unit + One-time cost + Fixed costsTarget units
Terms used
One-time (development) cost
Spending before launch that does not repeat: design, tooling, testing, certification.
Tooling
Moulds, dies and fixtures made for a specific product.
Break-even point
Units (or sales) at which total contribution equals the costs to be recovered.
Worked examples
HypotheticalBasicRecovering the development cost
One-time costs for a new product:
Design: ₹6,00,000
Tooling: ₹9,00,000
Testing and certification: ₹3,00,000
Total = ₹18,00,000
Price ₹2,500, variable cost ₹1,600: contribution ₹900 a unit
Units to recover = ₹18,00,000 ÷ ₹900 = 2,000 units
HypotheticalIntermediateHow many months to recover it?
Running the product line also costs ₹50,000 a month in fixed costs; sales are expected at 400 units a month.
At the planned ₹2,500, year-1 break-even = ₹24,00,000 ÷ ₹900 = 2,666.67, so 2,667 units
Quiz: payback, NPV, IRR and break-even with development cost
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