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So just a refresher on Discounted Payback Period, it is the time it will take to recover an initial investment for a project given its discounted cash flows. That is, we want Net Present Value greater than 0: the income of the project will be discounted to assess the loss in value due to time (inflation or opportunity cost) to find how long it would take to recover the initially money invested. In the following situation the cash flows are as presented.
Year
Cash Flows ($)
0
-2000
1
+1000
2
+1000
3
+2000
The first step is to calculate the discounted cash flow. Assuming the discount rate is 10%, we would apply the following formula to each cash flow:
PV = CF / (1 + r)t
where CF is Cash Flow, r = 10% and t = year
Year
Cash Flows ($)
Discounted Cash Flow
At 10% ($)
0
-2000
-2000
1
+1000
909
2
+1000
827
3
+2000
1503
The next step is to compute the cumulative discounted cash flow, by summing the discounted cash flow for each year.
Year
Cash Flows ($)
Discounted Cash Flow
At 10% ($)
Cumulative Discounted Cash Flows ($)
0
-2000
-2000
-2000
1
+1000
909
-1901
2
+1000
827
-264
3
+2000
1503
+1239
We see that between years 2 and 3 we will recover our initial investment. To calculate specifically when we could see how long it took to recover the 264 remaining by end of year 2 as followed:
264/1503 = 0.1756 years
Thus it will take a total of 2.1756 years to recover the initial investment. If the discounted payback period is two years, this project would not be accepted.
However if the cut off is any time greater than 2.1756 years the project would be accepted.
And that is how you calculate discounted payback period! Apologies if there is any miscalculations, but I double checked it, should be good J.
Wiki User
∙ 13y ago
Anonymous
an investment project provides cash flow of $800 per year for 8years.What is the project discounted payback period if the initial cost is $ 2000?
Anonymous
An investment project provides cash flow of $800 per year for 8 years . what is the project discounted cash flow pay back period using a discount rate of 8% and an initial cost of $ 2,000
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Are accounting rate of return and payback period non discount cashflow methods?
YES
What is a payback period?
payback period , it is to pay your period on time jajajaja
What is the formula for the payback period?
Formula for the Payback Period. Payback period = Initial investment / Annual Cash inflows
Adavntages of using payback period?
advantages of payback period?
How do you calculate payback period for an asset?
assets value $200000and number of year five cash flow is 70000,80000, 90000,90000and100000.and depreciation are $40000 each year .find out payback period for each assets
How do you calculate a payback period?
The payback period is ascertained by calculating the number of years needed to recover the cash invested in a project, For example, an investment of 1000 provides a return of 200,300,500 in consecutive three years. Then total of return in 3 years will be equal to the original investment. Hence the payback period is three years.
What is meant by the payback period?
Something is meant by the payback period. It is the length of time taken to recover the cost of an investment. This is what is meant by the payback period.
Payback period versus discounted payback period versus net present value versus profitability index?
discounted payback period
Limitatios of payback period?
- the payback period is to dependent on cash inflows which are hard to predict. - The payback period only considers revenue, does not consider profits.
What is payback period method?
Payback period method is the strategy used to calculate the amount of time that a given investment will take to recover the initial cost. The amount of time will help in deciding whether the project is viable or not. The shorter the period the more viable the project.
How is discounted payback period computed?
Payback period = Net Investment Annual cash returns
Discounted payback method?
A discounted payback method is a formula that is used to calculate how long to recoup investments based on the discounted cash flows of the investment. It is a variation of payback period or the time it takes to recover a project investment given the discounted cash flow it has.
