Discounted payback

The payback period measures the length of time it takes for the cash returns from a project to cover the initial investment.

The main problem with payback period is that it does not take account of the time value of money.

Hence, the discounted payback period can be computed instead.

Discounted payback period

Idea and interpretation

Discounted payback period measures the length of time before the discounted cash returns from a project cover the initial investment.

The shorter the discounted payback period, the more attractive the project is. A long discounted payback period indicates that the project is a high risk project.

Illustration

A project with the following cash flows is under consideration:

Cost of capital 8%

Required:

Calculate the Discounted Payback Period.

Solution

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Tags:	discounted payback;payback period;investment appraisal