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Edlintics

Discounted payback period

Discounted payback period is the time for discounted cash inflows to recover the initial outlay. It fixes ordinary payback's neglect of the time value of money, but still ignores post-payback flows.

ByHoang TruongUpdated

FrameworkInvestment appraisal

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A €60,000 project returns €25,000 a year; discounted at 8%, those flows are worth €23,148, €21,434 and €19,845 in years one, two and three, cumulating to €64,427. The €60,000 outlay is recovered partway through year three — after two years only €44,581 has come back — giving a discounted payback of about 2.78 years.

Where it fits
TopicCapital Budgeting & Investment AppraisalAdvancedSubjectCorporate FinanceAdvanced

The formula

LaTeX
DPP=min⁡T s.t. ∑t=1TCFt(1+r)t≥C0\text{DPP} = \min T \text{ s.t. } \sum_{t=1}^{T} \frac{CF_t}{(1+r)^t} \geq C_0

Variables

Discounted payback year (years)
Cash flow in period t (€)
Discount rate (decimal)
Initial investment (€)

Cumulate discounted flows period by period until the initial outlay is recovered; always longer than the ordinary payback period.

Discounted payback period — Edlintics Glossary