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Discounted Payback Period to evaluate Capital Budgeting Proposals

There are several financial metrics under use that find viability of an investment proposal that use Discounted cash flow. Here we will discuss difinition , formula, calculation with an example that will illustrate Discounted Payback Period along with a handy calculator.
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What is Discounted Payback Period

Payback Period does not consider time value of money when providing an answer whereas with Discounted Payback Period we get to see the real value of cash inflows when they are measured in today's amount of money as these are discounted at an interest rate called the Discount Rate. We get to see the number of years required to recoup the initial cash outlay or our investment.

What is the formula for Discounted Payback Period?

Discounted Payback Period Example

Let us illustrate finding Discounted Payback Period with an example investment proposal. Let us say you were offered a series of cash inflows at the end of each of the next four years as $50,000, $40,000, $30,000, and $10,000. Say the Initial Cost Outlay for this proposal is $100,000.

Discounted Payback Period Calculation

Year	CASH FLOWS	Discounted Cash Inflows	Cumulative Cash Inflows
Payback Period Calculation
0	-$100,000 (q)
1	$50,000	$47,169	$47,169
2 (p)	$40,000	$35,599	$82,769 (r)
3	$30,000	$25,188	$107,958
4	$10,000	$7,920	$115,879

Discounted Payback Period Step by Step

We add up the discounted cash inflows beginning after the initial cash outlay in the cumulative cash inflows column
We keep an eye on this last column and track the last year for which the cumulative total does not exceed the initial cash outlay
We compute the part or fraction of the next year's cash inflow need to payback the initial cash outlay by taking the initial cash outlay less the cumulative total in the last step then divide this amount by the next years cash inflow.
E.g., ( $100,000 - $82,769 ) / $25,188 = 0.684
To now obtain the Discounted Payback Period in years , we take the figure from the last step and add it to the year from the step 2. Thus our Discounted Payback Period is 2 + .684 = 2.684 years
Instead of represent the years as decimal value we could represent the Discounted Payback Period in years and months this way We take the fraction 0.684 and multiply it by 12 to get the months which is 8.20 months. Thus our Discounted Payback Period is 2 years and 8 months

Discounted Payback Period in MS Excel