Discounted Payback period Formula

Discounted Payback period Formula

Discounted payback period takes into time value of money. Payback period was widely criticized for its time value ignorance limitation. By introducing discounted payback period this limitation can be removed.

Example

Year 0          200,000

Year 1          80,000

Year 2          70,000

Year 3          80,000

Year 4          60,000

Discount rate 20 Calculate discounted payback period

Solution

Year             Amount             Discount Rate            PV             Cumulative PV

Year 0          200,000              1                      (200,000)

Year 1          80,000              (1+20%)^-1              66,667               133,333

Year 2          70,000              (1+20%)^-2              48,611                84,722

Year 3          80,000              (1+20%)^-3              46,296               38,426

Year 4          90,000              (1+20%)^-4              43,402               (4976)

A + B/C

A= previous year when cumulative value become negative

B= Cumulative value of last year

C= PV of year in which value become negative

3 + 38426/43402

=3.885 Years