Discounted payback period is the period in which the full investment is recovered out of discounted cash flows. Unlike the simple payback period, the discounted payback period considers the time value of money and it represents a more realistic estimation of payback period.
Assume a project with an initial investment of $20,000 that pays $5,000 every year for 6 years. Using simple payback period the investment will be fully recovered in 4 years. In case of a discounted payback period, the $20,000 will be recovered in 5 years and 4 months, i.e. {(20000-18953.93)/2822.37}.
|
Year |
Cash Flows |
Simple Payback |
Disc. @ 10% |
Discounted Cash Flows |
Discounted Payback |
Recovery in Year |
|
0 |
-20000 |
|
|
|
|
0 |
|
1 |
5000 |
5000 |
0.91 |
4545.45 |
4545.45 |
1 |
|
2 |
5000 |
10000 |
0.83 |
4132.23 |
8677.69 |
2 |
|
3 |
5000 |
15000 |
0.75 |
3756.57 |
12434.26 |
3 |
|
4 |
5000 |
20000 |
0.68 |
3415.07 |
15849.33 |
4 |
|
5 |
5000 |
|
0.62 |
3104.61 |
18953.93 |
5 |
|
6 |
5000 |
|
0.56 |
2822.37 |
21776.30 |
6 |
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