One of the major disadvantages of simple payback period is that it ignores the time value of money.
Discounted Payback Period A, b C, where, A, last period with a negative discounted cumulative cash flow;.
In addition to weight watchers online promotion code canada the first two flaws, the business owner also has to guess at the interest rate or cost of capital.
Solution, step 1: Prepare a table to calculate discounted cash flow of each period by multiplying the actual cash flows by present value factor.Absolute value of discounted cumulative cash flow at the end of the period A; C, discounted cash flow during the period after.Add the first years discounted cash flow to the initial investment.Calculate the cumulative discounted cash flows: Year 0: - 10,000 Year 1: - 5,454.55 Year 2: - 42,148.76 Year 3: 105.18 Discounted payback period (DPP) occurs when the negative cumulative discounted cash flows turn into positive cash flows which, in this case, is between the.The rest of the procedure is similar to the calculation of simple payback period except that we have to use the discounted cash flows as calculated above instead of actual cash flows.It is interesting to note that if a project has negative net present value it won't pay back the initial investment.In the example, divide -454.55 by 661.16, which equals -0.69, and use positive.69 for the result.Step 3, discount the second years cash flow using the same formula as the first years cash flow, but adjusting n to the second year.(See References 3, A variant: Discounted payback).(See References 2,.This flaw overstates the time to recover the initial investment.Alternatively, go to one of several financial circle line discount code 2015 online financial calculator sites.Divide the first years cash flow by (1 i)n to discount the cash flow.Step 3, determine how much of the final year is required to pay back the initial investment.
The discounted payback period calculation differs only in that it uses discounted cash flows.