What is the difference between discount payback period and payback period

Expert Solution

Payback period is the time within which cost of project is recovered back.

Discounted payback considers time value of money.

Working with example:

Cost	100
Cash inflow:
Year 1	25
Year 2	25
Year 3	25
Year 4	25
Year 5	25

Discount rate	5%

Payback period of this project	=	100	/	25
	=	4

in 4 years, all costs is recovered back.

Discounted Payback period:

Year	Cash Flow	Discount factor	Present Value	Cumulative present value
x	a	b=1.05^-x	c=a*b	d
1	25	0.952381	23.81	23.81
2	25	0.907029	22.68	46.49
3	25	0.863838	21.60	68.08
4	25	0.822702	20.57	88.65
5	25	0.783526	19.59	108.24

Discounted payback period	=	4+(100-88.65)/19.59
	=	4.58

Discounted payback period of project is 4.58 years.

jeff jeffy answered 1 year ago

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