Here we will define, explain and show example calculation for discounted payback period method which is one of the many measures employed by an analyst to find an investor's ROI - the return on investment. Here, me Abraham A. will take you on a guided tour to define, explain and illustrate example calculation of discounted payback period.
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Finding discounted payback period with paper and pencil is a time consuming task, we will save you the time and headache by offering you software tools such as Excel worksheet function and Windows 7 & 8 calculator that will help find the discounted payback period with relative ease. Follow the links shown below for more information
Discounted payback period DPP is explained and illustrated with example calculation using the Discounted payback period formula. On this web page we take a look into the way discounted payback period or DPP is used in investment analysis. We will look at finding discounted payback period for cash flows that have varying frequencies (annual, quarterly, monthly, weekly and daily).
Payback Period does not consider time value of money when providing an answer whereas with Discounted Payback Period we get to see the real value of cash inflows when they are measured in today's amount of money as these are discounted at an interest rate called the Discount Rate. We get to see the number of years required to recoup the initial cash outlay or our investment.
Let us illustrate finding Discounted Payback Period for an example investment proposal. Let us say you were offered a series of cash inflows at the end of each of the next four years as $50,000, $40,000, $30,000, and $10,000. Say the Initial Cost Outlay for this proposal is $100,000.
|Year||Cash Flows||DCF||Cumulative DCF|
Although discounted payback period is a preferred method since it takes time value of money in to consideration yet regular payback period is a more popular method. With simple payback period the cash flows are not discounted unlike the discounted payback period where each of the net cash flows is discounted before an attempt is made to find the time period required to regain the initial cost of the investment. Another tutorial explains the payback period.
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