If a company is using the discounted payback period but they are not sure of their discount rate, they can use the Weighted Average Cost of Capital (WACC). C = Discounted cash flow during the period after A. However, it Using the payback period Discounted Payback Period is the duration that an investment requires to recover its cost taking into consideration the time value of money. Formula: Discounted Payback Period (DPP) = A + (B / C) Where, A - Last period with a negative discounted cumulative cash flow B - Absolute value of discounted cumulative cash flow at the end of the period A C - Discounted cash flow during the period after A. When trying to estimate whether or not a new investment is financially viable, you should have a discount rate in mind. In other words, the investment will not be recovered value, regardless of whether it occurs in the 1st or in the 6th year. However, the ordinary payback period does not factor in the time value of money. Payback Period formula just calculates the number of years which will take to recover the invested funds from the particular business. In discounted payback period we have to calculate the present value of each cash inflow. This article breaks down the DCF formula into simple terms with examples and a video of the calculation. investment is used as the discount rate to calculate the discounted payback n, the number of periods, based on the present value of annuity formula can be used. In this calculation: X = is the last time period where the cumulative discounted cash flow (CCF) was negative. Although it is not explicitly mentioned in the Project Management Body of Knowledge (PMBOK) it has practical relevance in many projects as an enhanced version of the payback period (PBP). Calculate the discounted payback period of this project if Mr Smith is using a discount rate of 10%. The discounted payback period (DPP) is the amount of time that it takes (in years) for the initial cost of a project to equal to discounted value of expected cash flows, or the time it takes to break even from an investment. We can apply the values to our variables and calculate the discounted payback period for the investment. The simple payback period formula can be used as a quick measurement, however discounting each cash flow can provide a more accurate picture of the investment. Here is the formula for the discounted cash flow: D C F = C ( 1 + r) n. DCF = \dfrac {C} { (1 … Pro members can track their course progress and get access to exclusive downloads, quizzes and more! For example, a project cost is \$ 20,000 and annual cash flows are uniform at \$4,000 per anum and the life of asset acquire is 5 years then the payback period reciprocal will be as follows. In project management, this measure is often used as a part of a cost-benefit analysis, supplementing other profitability-focused indicators such as internal rate of return or return on investment.