Discounted payback period is used to evaluate the time period needed for a project to bring in enough profits to recoup the initial investment.
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%.
Initial investment = Rs. 50000 Years(n) = 8 Rate(i) = 11 % CF = 10000
Discounted Payback Period (DPP)
| Year(n) | Cash Flow (CF) | Present Value FactorPV = 1/(1+i)n | Discounted Cash Flow (CF x PV) | Cumulative Discounted Cash Flow (CCF) |
|---|---|---|---|---|
| 0 | 50000 | 1 | 50000 | 50000 |
| 1 | 10000 | 0.9 | 9009.01 | 40990.99 |
| 2 | 10000 | 0.81 | 8116.22 | 32874.77 |
| 3 | 10000 | 0.73 | 7311.91 | 25562.85 |
| 4 | 10000 | 0.66 | 6587.31 | 18975.54 |
| 5 | 10000 | 0.59 | 5934.51 | 13041.03 |
| 6 | 10000 | 0.53 | 5346.41 | 7694.62 |
| 7 | 10000 | 0.48 | 4816.58 | 2878.04 |
| 8 | 10000 | 0.43 | 4339.26 | -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
