discounted payback period formula investopedia

Thus, since PV of the annuity equals the initial investment, solving for n, the number of periods, based on the present value of annuity formula can be used.
Using a present value discount calculations, this figure is online coupons for target free shipping 961.54.Another disadvantage is that cash flows beyond the discounted payback period are ignored entirely with this method.The discounted cash inflow for each period is to be calculated using the formula: Discounted Cash Inflow, actual Cash Inflow (1 i)n.Decision Rule, if the discounted payback period is less that the target period, accept the project.Usually the above formula is split into two components which are actual cash inflow and present value factor (.e.Using the prior example of a project that costs 5,000 with 1,000 annual cash flows.Example of Discounted Payback Period.Cumulative Discounted, cash Flow 0 2,324,000.0000 2,324,000 2,324,000 1 600,000.9009 540,541 1,783,459 2 600,000.8116 486,973 1,296,486 3 600,000.7312 438,715 857,771 4 600,000.6587 395,239 462,533 5 600,000.5935 356,071 106,462 6 600,000.5346 320,785 214,323 Step 2: Discounted Payback Period.Disadvantage: It ignores the cash inflows from project after the payback period.
CF, present Value Factor, pV11 1i)n, discounted Cash Flow.
The only difference between solving for n based on the PV of annuity formula and the formula shown at the top of the page is substituting PV for the initial investment since they are both equal.
In many cases, the cash flows will not be equal.1 / ( 1 i )n ).Thus discounted cash flow is the product of actual cash flow and present value factor.These cash flows are then reduced by their present value factor to reflect the discounting.Assuming the rate is 10, the present value of the first cash flow would be 909.09, which is 1,000 divided.For this reason, the payback period may return a positive figure, while the discounted payback period returns a negative figure.Discounted payback period is calculated by the formula: DPP Year before DPP occurs Cumulative Discounted Cash flow in year before recovery Discounted cash flow in year after recovery 2, advantages edit, discounted Payback Period helps businesses reject or accept projects by helping determine their profitability.This may warrant rounding up to determine how long it would take to recoup the initial investment.Although this formula calculates results with decimals, it is important to consider that there may be a slight difference due to rounding and more importantly, that there may not be a such thing as a partial cash inflow.




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