For companies with liquidity issues, payback period serves as a good technique to select projects that payback within a limited number of years.

The discounted after-tax cash flow method values an investment, starting with the amount of money generated. The key difference between payback period and discounted payback period is that The payback period is the length of time required to recover the cost of an investment. For example, projects with higher cash flows toward the end of the project life will experience greater discounting due to compound interest. The payback period can be found by dividing the initial investment costs of $100,000 by the annual profits of $25,000, for a payback period of 4 years. Knowing the amount of time that a project would take to recover the initial investment is essential to decide whether the project should be invested in or not. See Also: Payback Period Method Bailout Payback Method Rule of 72. However, payback period does not consider the time value of money, thus is less useful in making an informed decision.

Normal cash flows are used in payback period whereas discounted payback period uses discounted cash flows. These two investment appraisal techniques are less complex and less useful compared to others such as Dili has a professional qualification in Management and Financial Accounting. The discounted payback period process is applied to each additional period's cash inflow find the point at which the inflows equal the outflows. It is usually a negative number as there is little or no income. NPV (Net Present Value) is calculated in terms of currency while Payback method refers to the period of time required for the return on an investment to repay the total initial investment.Payback, NPV and many other measurements form a number of solutions to evaluate project value. The project is expected to return $1,000 each period for the next five periods, and the appropriate

Initial cash flow is the money available to a business project in its planning stages. The discounted payback period calculation begins with the -$3,000 cash outlay in the starting period. The payback period can be calculated using the following formula.E.g. To determine the payback period, you divide a project’s total cost by the annual cash flow that you expect the project to generate. The payback period and the discounted payback period are measures that allow us to assess in how many years the original investment will pay back. The discounted payback period will be,Discounted payback period evades the main drawback of payback period by using discounted cash flows.

Year1= $4m, Year2= $5m, Year3= $8m, Year4= $8m and Year5= $ 10m. Here, the cash flows will be discounted at a E.g. Function of Discounted Payback Period What Does the Discounted Payback Period Tell You? The profitability index (PI) is a technique used to measure a proposed project's costs and benefits by dividing the projected capital inflow by the investment. It generates the cash flows as follows. The offers that appear in this table are from partnerships from which Investopedia receives compensation. For example, if a project’s purchase price is $210,000 and you expect the project to generate a cash flow of $30,000 per year, the project’s payback period is seven years. After the discounted cash flows of $1,000 / (1.04) Therefore, the discounted payback period is sometime during the fourth period. For companies with Discounted payback period is the length of time required to recover the cost of an investment after considering the time value of money. The Difference Between Payback Period and Discounted Payback Period Discounted payback period refers to the time period required to recover its initial cash outlay and it is calculated by discounting the cash flows that are to be generated in future and then totaling the present value of future cash flows where discounting is done by the weighted average cost of capital or internal rate of return.

Using the present value discount calculation, this figure is $1,000/1.04 = $961.54. The payback period is the amount of time for a project to break even in cash collections using nominal dollars.

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