Calculate Discounted Payback Period

Discounted Payback Period Formula:

\[ \text{Payback Period} = \text{time until } \sum_{n=1}^{t} \frac{CF_n}{(1 + r)^n} \geq \text{Initial Investment} \]

Initial Investment:

Discount Rate:

decimal (e.g. 0.1 for 10%)

Cash Flows (comma separated):

$ per period

Discounted Payback Period:

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1. What is Discounted Payback Period?

The discounted payback period is the time it takes for the sum of the discounted cash flows to equal the initial investment. Unlike regular payback period, it accounts for the time value of money by discounting future cash flows.

2. How Does the Calculator Work?

The calculator uses the discounted payback period formula:

\[ \text{Payback Period} = \text{time until } \sum_{n=1}^{t} \frac{CF_n}{(1 + r)^n} \geq \text{Initial Investment} \]

Where:

$ CF_n $ — Cash flow in period n
$ r $ — Discount rate (decimal)
$ t $ — Time period when cumulative discounted cash flows ≥ initial investment

Explanation: Each cash flow is discounted back to present value, and we find when the sum of these discounted cash flows equals or exceeds the initial investment.

3. Importance of Discounted Payback Period

Details: This metric helps investors understand how long it takes to recover their investment in present value terms, accounting for the opportunity cost of capital. It's more rigorous than regular payback period but still ignores cash flows beyond the payback period.

4. Using the Calculator

Tips: Enter the initial investment amount, discount rate (as decimal, e.g., 0.1 for 10%), and comma-separated list of expected cash flows (e.g., "100,200,300").

5. Frequently Asked Questions (FAQ)

Q1: How is this different from regular payback period?
A: Regular payback period doesn't discount future cash flows, while this method accounts for the time value of money.

Q2: What's a good payback period?
A: Shorter is generally better, but depends on industry standards and investment alternatives. Typically under 3-5 years is considered acceptable.

Q3: What if my investment is never recovered?
A: The calculator will indicate this. You may need to reconsider the investment or adjust cash flow projections.

Q4: How does discount rate affect the result?
A: Higher discount rates lead to longer payback periods as future cash flows are discounted more heavily.

Q5: Should I use this as my only investment metric?
A: No, it should be used alongside NPV and IRR for a complete picture, as it ignores cash flows beyond the payback period.