Discounted Payback Calculation Examples Help

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Concept of Discounted Payback Period

As payback period does not consider the time value of money, discounted payback period was adopted so that time value of money is taken into account.
In discounted payback period, we have to calculate the present value of each cash inflow considering the start of the first period as zero point. For this purpose, the management has to set a suitable discount rate. The discounted cash inflow for each period is to be calculated using the formula
Discounted Cash Inflow = Actual Cash Inflow/(1 + i)n
i is the discount rate;
n is the period to which the cash inflow relates.
The rest is same as payback period formula that is
Payback Period = years before fully recovery + (unrecovered cost at the start of the year/
Cashflow during the year)

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Discounted Payback Calculation Examples Explanation

Let’s take an example and understand it better
An initial investment of $2,324,000 is expected to generate $600,000 per year for 6 years. Calculate the discounted payback period of the investment if the discount rate is 11%.
Year cashflow Present value Discounted Cumulative
Factor Cashflow Discounted Cashflow
0 $ −2,324,000 1.0000 $ −2,324,000 $ −2,324,000
1 600,000 0.9009 540,541 − 1,783,459
2 600,000 0.8116 486,973 − 1,296,486
3 600,000 0.7312 438,715 − 857,771
4 600,000 0.6587 395,239 − 462,533
5 600,000 0.5935 356,071 − 106,462
6 600,000 0.5346 320,785 214,323
Discounted Payback Period = 5 + |-106,462| / 320,785 ≈ 5.32 years
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