How to Calculate Discounted Payback Period - Tutorial

How to Calculate DPP - Definition, Formula, Example

Definition:

Discounted payback period is used to evaluate the time period needed for a project to bring in enough profits to recoup the initial investment.

Formula:

Discounted Payback Period (DPP) = A + (B / C) Where, A - Last period with a negative discounted cumulative cash flow B - Absolute value of discounted cumulative cash flow at the end of the period A C - Discounted cash flow during the period after A.

Example:

An initial investment of Rs.50000 is expected to generate Rs.10000 per year for 8 years. Calculate the discounted payback period of the investment if the discount rate is 11%.

Given,

Initial investment = Rs. 50000 Years(n) = 8 Rate(i) = 11 % CF = 10000

To Find,

Discounted Payback Period (DPP)

Solution:

Year(n) Cash Flow (CF) Present Value FactorPV = 1/(1+i)n Discounted Cash Flow (CF x PV) Cumulative Discounted Cash Flow (CCF)
05000015000050000
1100000.99009.0140990.99
2100000.818116.2232874.77
3100000.737311.9125562.85
4100000.666587.3118975.54
5100000.595934.5113041.03
6100000.535346.417694.62
7100000.484816.582878.04
8100000.434339.26-1461.23

Last period with a negative discounted cumulative cash flow (A) = 7 Absolute value of discounted cumulative cash flow at the end of the period (B) = 2878.04 Discounted cash flow during the period after (C) = 4339.26 Discounted Payback Period = A + (B / C) = 7 + (2878.04 / 4339.26) = 7.66 years


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