Wize University Introduction to Finance Textbook > Capital Budgeting
Discounted Payback Periods
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Discounted Payback Period (DPB)
The discounted payback period is similar to the payback period but takes into account the time value of money and the investors cost of capital. This can be used to evaluate investments.
- The amount of time needed to recoup the initial investment using discounted cash flows (present values)
- Can be used to evaluate profitability of an investment because it considers the cost of capital.
- Discounted payback period must be below the cut-off of the investment for it to be profitable.
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Example: Discounted Payback Period
You are considering 5-year investment that will require in initial cash outlay of $40,000. The expected inflows in years 1 through 3 are $10,000; then $12,000 in year 4 and $20,000 in year 5. Your cost of capital is 12% per year.
What is the discounted payback period?
Practice: Discounted Payback Period
An investment requires an initial after-tax cash outlay of $6,000 and will return $3,000 in the first year, $3,000 in the second year and $4,000 in the third. If the investor's cost of capital if 9%, what is the discounted payback period?
Round final answer to 2 decimal places
| The discounted payback period is | years |