This discounted payback period calculator estimates the period of time will take an investment to generate positive cash flows that cover its initial/total cost. There is more information on this topic below the form.


Initial investment (OF):*
$
Annual discount rate (r):*
%
Annual positive cash flow (CF):*
$

How does this discounted payback period calculator work?

This financial tool allows calculating the discounted payback period by considering 3 variables that are mandatory:

  • Starting investment (SI) or the so called initial outflow represents the cost of the plan supported by the investor.

  • Discount rate (r) or the expected yearly rate of return the investment will most probably generate. Please note this is a fixed value used for all years of the investment. As it is usually expressed as a percentage please remember to convert it to decimal: e.g 5% is 0.05.

  • Annual cash flow value (ACF) which is the amount generated by the business.

The algorithm behind this discounted payback period calculator applies this standard DPP formula:

DPP = ln(1 / (1 - ((SI * r) / ACF)) / ln(1 + r)

Discounted payback period interpretation

This is a relevant indicator that measures and indicates the period of time required to recoup entirely the cost of an investment by considering the discounted cash flows it generates. It is a very used concept by investors when comparing between multiple opportunities or investments project plans to decide which one has the smallest payback period.

Thus the smaller the discounted payback period is the better, as it demonstrates the fact that the investment will be recouped quickly.

Example of a calculation

An initial investment of $1,000,000 is expected to generate an annual cash flow of $155,000. Let’s figure out the discounted payback period of the project if the discount rate is 15%?

Discounted payback period = 24.57 years (24 years and 7 months)

The discounted payback period schedule:

Year (n)Cash Flow (CF)Present Value Factor PVF=1/(1+r)nDiscounted Cash Flow (CFxPVF)Cumulative Discounted Cash Flow (CDCF)
0 $-1,000,000.00 1.00 $-1,000,000.00 $1,000,000.00
1 $155,000.00 0.87 $134,782.61 $865,217.39
2 $155,000.00 0.76 $117,202.27 $748,015.12
3 $155,000.00 0.66 $101,915.02 $646,100.11
4 $155,000.00 0.57 $88,621.75 $557,478.35
5 $155,000.00 0.50 $77,062.39 $480,415.96
6 $155,000.00 0.43 $67,010.78 $413,405.18
7 $155,000.00 0.38 $58,270.24 $355,134.94
8 $155,000.00 0.33 $50,669.77 $304,465.17
9 $155,000.00 0.28 $44,060.67 $260,404.49
10 $155,000.00 0.25 $38,313.63 $222,090.86
11 $155,000.00 0.21 $33,316.20 $188,774.66
12 $155,000.00 0.19 $28,970.61 $159,804.06
13 $155,000.00 0.16 $25,191.83 $134,612.22
14 $155,000.00 0.14 $21,905.94 $112,706.28
15 $155,000.00 0.12 $19,048.65 $93,657.63
16 $155,000.00 0.11 $16,564.04 $77,093.60
17 $155,000.00 0.09 $14,403.51 $62,690.08
18 $155,000.00 0.08 $12,524.79 $50,165.29
19 $155,000.00 0.07 $10,891.12 $39,274.16
20 $155,000.00 0.06 $9,470.54 $29,803.62
21 $155,000.00 0.05 $8,235.25 $21,568.37
22 $155,000.00 0.05 $7,161.09 $14,407.28
23 $155,000.00 0.04 $6,227.04 $8,180.24
24 $155,000.00 0.03 $5,414.81 $2,765.43
25 $155,000.00 0.03 $4,708.53 $-1,943.11

21 Feb, 2015 | 0 comments

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