Analysis of investments is performed with the use of various financial methods to find an investor's return on investment. Here, we will explore finding discounted payback period which is one of the discounted cash flow techniques that helps us analyze investments. The discounted payback period is defined as the time period required to recover just the initial cost of the project whilst discounting each of the cash flows to reflect their present value.
Spreadsheet programs are commonly and often used for financial analysis and in this respect you will be informed about the availablity of a discounted payback period spreadsheet function called tadDPP. The tadDPP function may be typed in to a worksheet cell of various offline and web based spreadsheet programs. Excel, OpenOffice calc, LibreOffice calc, IBM Symphony spreadsheet, Office 365 (Web version), and Google Docs spreadsheet are some of the popular spreadsheet programs that support the use of tadDPP to find simple payback period.
There are eight different Excel payback period functions namely tadDPP, tadXDPP, tadTDPP, tadXTDPP, tadDPPSchedule, tadXDPPSchedule, tadTDPPSchedule, and tadXTDPPSchedule that may be used as worksheet cells in Excel 2007, 2010 and 2013 to find the payback period. Each of these financial functions return distinct results depending on the data that is entered. We will briefly introduce each of these functions in the following paragraphs.
The tadDPP is used to calculate the discounted payback period when cash flows along with discount rate are entered and we require to know the time period needed to recover the cash flows. We will be able to specify whether the payments begin immediately or it they begin at the end of first period. You will also be able to define the length of the period, for example, we can say that each of the period is a year, half year, quarter, month, fortnight, week, day or even an hour. The payback period returned by tadDPP function will be an annualized payback period.
In general we would use a single discount rate for discounting the cash flows yet in finance and banking it is common practice to make use of different discount rates for each of the cash flows. For this we would use tadDPPSchedule function that accepts a schedule of cash flows and discount rates to find the discounted payback period.
When we want to know the time period needed to recover all costs not just the initial cost then you would have to use the tadTDPP function. This function will find the actual, true or real discounted payback period. The other options you can specify with this function are the same as those we discussed with tadDPP.
Given that we want to know the actual discounted payback period for our schedule of cash flow yet it is required that we make use of varying discount rates, thus we would make use of tadTDPPSchedule Excel function that accepts a series of cash flows and discount rates that returns the time period required to recover all costs.
If the cash flows have a corresponding date schedule then you may opt to use tadXDPP function to calculate the time required to recoup the initial cost of the project whilst discounting the cash flows.
If the cash flows have a corresponding date schedule along with a rate schedule then you will make use tadXDPPSchedule function to calculate the time required to recoup the initial cost of the project whilst discounting the cash flows at different rates.
And if you required to find the real, or actual discounted payback period when you have cash flows, discount rate and a series of dates then you will have to use the tadXTDPP function. You will have to enter the series of cash flows, the discount rate and the date schedule to get the results.
And if you required to find the true, or real discounted payback period when you have a schedule of cash flows, and discount rates, and corresponding dates then you will have to use the tadXTDPPSchedule function. You will have to enter a cash flow schedule, the discount rate schedule and the date schedule to get the results.
tadDPP family of Excel financial functions are part of tadXL add-in that may be installed with Excel 2007, 2010 and 2013 on computers running Windows operating systems. More details about each of the functions may be found at tadxl.com.