Question

Discounted pay back method which is the time needed to pay back the original investment in terms of discounted future cash flows.

Define the technique.

Discuss the difference between the two methods.

Analyze the numbers in the problem using an excel spreadsheet.

Use a 10% discount rate.

You must use Excel formulas which are on the ribbon in Excel marked Fx to make your calculations whenever possible.

Carry out the answers at least two decimal places

Year	Project A	Project B	Project C
2018	($3,000,000)	($3,000,000)	($3,200,000)
2019	$0	$975,000	$985,000
2020	$600,000	$975,000	$925,000
2021	$900,000	$975,000	$1,000,000
2022	$3,000,000	$1,000,000	$950,000

Answer 1

When an individual or an organization has to find out whether undertaking a project is profitable or not, the discounted payback technique is used. The expected future cash flows are discounted back to the present time. It helps to find out the time required to cover the initial investment made.

Payback Period Method	Discounted Payback Period Method
It is a traditional method of investment decision making	It is a modern technique of investment decision making
It does not take into account the time value of money	It takes into account the time value of money
It is easier to calculate	It is cumbersome to compute

Year	Project A	Discounted Cash Flow (Project A)	Project B	Discounted cash Flow (Project B)	Project C	Discounted Cash Flow (Project C)
2018	($3,000,000)	($3,000,000)	($3,000,000)	($3,000,000)	($3,200,000)
2019	$0	$0 / [(1+0.1)1]	$975,000	$975,000 / [(1+0.1)1]	$985,000	$985,000 / [(1+0.1)1]
2020	$600,000	$600,000 / [(1+0.1)2]	$975,000	$975,000 / [(1+0.1)2]	$925,000	$925,000 / [(1+0.1)2]
2021	$900,000	$900,000 / [(1+0.1)3]	$975,000	$975,000 / [(1+0.1)3]	$1,000,000	$1,000,000 / [(1+0.1)3]
2022	$3,000,000	$3,000,000 / [(1+0.1)4]	$1,000,000	$1,000,000 / [(1+0.1)4]	$950,000	$950,000 / [(1+0.1)4]
Total discounted cash flows		$3,221,091.45		$3,107,694.15		$3,060,094.94
Discounted payback period		3.89 Years		3.84 Years		4+ Years

Thus project B is the best choice as it has the lowest discounted payback period.