What is Discounted Payback Period?

Suppose that you are going to invest $100,000 and purchase an apartment. You are going to receive a rental income of $24,000 a year. You might one to know how many years you need for this investment to pay back. This is called payback period. This calculation can be further complicated by the irregular cash flows that you receive and the time value of money. Unlike the regular payback period, the discounted payback period metric considers this depreciation of your money due to time value. Although more pessimistic, the value obtained using the discounted payback period calculator will be closer to reality .

How to Use Discounted Payback Period Calculator?

Let’s assume that you have an investment opportunity that requires you to invest $2,500 that will give you 5 different cash flows.If the discount rate is 8%, You may want to know how many years it will take you to get yo ur initial investment back while considering time value of money. Below are the entries you are going to make in our calculator.

Initial Investment:

This number is by default a negative number. What it meaans is that investment in to the project is always a Cash outflow (negative number) from you. In finance, investment is always defined as a negative number. You need to enter your initial investment as $2,500.

Number of Cash Flows:

From the dropdown box, select how many yearly cash flows input boxes you want for your project. Let’s assume that your investment has 5 cash flows. Therefore, select, 5 from the list.

Cash Flows due:

Depending on the number of cash flow input boxes you selected, you need to enter all cash flows. For example, for your investment, enter $500, $600, $700, $800, and $900.

Once you have entered all the numbers as stated above, click on “Calculate” button. The calculator will show you the discounted payback period of 4.619 years . This means that your investment will tak e approximately 4.619 years to get your initial investment of $2,500 back. Additionally, if you click on the fixed CF tab, you need to only define one cash low assuming that this cash flow will be fixed. You can also increase the cash flow by a fixed percentage over the years if like so. The table also shows the discounted cash flows and cumulative cash flows.