Discounted Payback Period

AAA

DEFINITION of 'Discounted Payback Period'

A capital budgeting procedure used to determine the profitability of a project. In contrast to an NPV analysis, which provides the overall value of an project, a discounted payback period gives the number of years it takes to break even from undertaking the initial expenditure. Future cash flows are considered are discounted to time "zero." This procedure is similar to a payback period; however, the payback period only measure how long it take for the initial cash outflow to be paid back, ignoring the time value of money.

INVESTOPEDIA EXPLAINS 'Discounted Payback Period'

Projects that have a negative net present value will not have a discounted payback period, because the initial outlay will never be fully repaid. This is in contrast to a payback period where the gross inflow of future cash flows could be greater than the initial outflow, but when the inflows are discounted, the NPV is negative.

RELATED TERMS
  1. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s ...
  3. Payback Period

    The length of time required to recover the cost of an investment. ...
  4. Discounted Cash Flow - DCF

    A valuation method used to estimate the attractiveness of an ...
  5. Capital Budgeting

    The process in which a business determines whether projects such ...
  6. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
RELATED FAQS
  1. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
  2. What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?

    Book value of equity per share (BVPS) is a ratio used in fundamental analysis to compare the amount of a company's shareholders' ... Read Full Answer >>
  3. What is the effective interest method of amortization?

    The effective interest method is an accounting practice used for discounting a bond. This method is used for bonds sold at ... Read Full Answer >>
  4. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
  5. Is there a way to include intangible assets in book-to-market ratio calculations?

    The book-to-market ratio is used in fundamental analysis to identify whether a company's securities are overvalued or undervalued. ... Read Full Answer >>
  6. What are some of the limitations and drawbacks of using a payback period for analysis?

    Limitations, or disadvantages, of using the payback period method in capital budgeting include the fact that it fails to ... Read Full Answer >>
Related Articles
  1. Retirement

    Delay In Retirement Savings Costs More In The Long Run

    The effects of compounding make it cheaper over the long term to save for retirement.
  2. Investing Basics

    Understanding The Time Value Of Money

    Find out why time really is money by learning to calculate present and future value.
  3. Retirement

    For IRAs, Time Is Money

    Don't procrastinate. The timing of your contributions can mean thousands more in savings.
  4. Markets

    Valuing A Stock With Supernormal Dividend Growth Rates

    If these calculations are off, it could drastically change the value of the shares.
  5. Forex Education

    Time Value Of Money: Determining Your Future Worth

    Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation.
  6. Options & Futures

    Variable Annuity Benefits: What The Fine Print Won't Tell You

    Learn the truth before you strap yourself into these annuity "seat belts".
  7. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  8. Personal Finance

    Affordable Ways For Upgrading Your Home

    Upgrading your home doesn’t have to be an expensive chore. Here we give you 8 affordable ways to increase its appeal.
  9. Retirement

    Millennials: Retire With $1,000,000 --Here's How

    It is possible for Millennials to retire with $1,000,000, if they take the right steps and make the necessary sacrifices now.
  10. Budgeting

    The Adverse Effects of Cheap Gas

    While low gas prices are welcomed, smart budgeters must anticipate future price hikes and consider the impact of low gas prices on investments and taxes.

You May Also Like

Hot Definitions
  1. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  2. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  3. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  4. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  5. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  6. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!