Discounted Pay Back Period

The discounted payback period measures how quickly the benefits from the investment "pay back" after adjusting cash flows for the time value of money using discounted cash flows.

The Discounted Pay back method can be used in two ways.

1. The company can decide only top accept investment projects that "pay back" discounted cash flows within a predetermined time.
2. The company can select between competing investment projects by selecting those with the shortest pay back periods using the discounted cash flow method.

There is a strong argument for excluding working capital from payback calculations (remember we are appraising the project, not calculating how much net cash flow is generated each year).

Management want to know how quickly the project will recover at least the initial capital outlay. And working capital is (or should be) fully recovered at the end of the project. So there is a case for excluding working capital.

There is one drawback to the payback period method:

When there is more than one investment amount (several in differing time periods), pay back becomes difficult to interpret.

Software Links

Investment-Calc Screens

Reference Pages

Discounted Cash Flow

Discount Rate