calculate the period in which the initial investment is paid back. [1] It is the period in which the cumulative net present value of a project equals zero.

The discounted payback period has a similar purpose as the payback period which is to determine how long it takes until an initial investment is amortized through the cash flows generated by this asset.

In this calculation: X = is the last time period where the cumulative discounted cash flow (CCF) was negative. value, regardless of whether it occurs in the 1st or in the 6th year. The simple payback period formula would be 5 years, the initial investment divided by the cash flow C = Discounted cash flow during the period after A. As stated in the prior section, the process of calculating the discounted payback period when all cash flows are equal could

What Is the Difference between Payback Period and

One of the major disadvantages of simple payback period is that it ignores the time value of money.

*The content of this site is not intended to be financial advice. The Discounted Payback Period (or DPP) is X + Y/Z. Here is a sample table: Note that period 0 doesn’t need to be discounted because that is the initial investment. The cumulated discounted cash flow becomes positive in period 5. It is interesting to note that if a project has negative net present value it won't pay back the initial investment.

discounted cash flows and the cumulative discounted cash flows are bolded in In other words, the investment will not be recovered

The discounted cash inflow for each period is then calculated using the formula:Where,i is the discount rate; andn is the period to which the cash inflow relates.Sometimes, the above formula may be split into two components which are: actual cash inflow and present value factor i.e. This requires the use of a discount As a simple example, suppose that an initial cost of a project is $5000 and each cash flow … Using the payback period rate of 10%, the discounted payback period for this example would be calculated based on the following equation: The equation for this example would be reduced to: which results in a discounted payback period of 7.273. Here is the formula for the discounted payback period:eval(ez_write_tag([[728,90],'studyfinance_com-leader-1','ezslot_3',114,'0','0'])); To calculate variable B—the investment’s remaining balance—you would take the total amount invested and subtract the sum total of each period up to and including variable W. These formulas account for irregular payments, which are likely to occur.

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