Discounted payback


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In the calculation of the NPV, a column records the cumulative present value of the cash flows. Since the payback method is criticised for ignoring the time value of money it is possible to remedy this shortcoming by using the discounted cash flows to ascertain the payback period.

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In this example, the payback period is just over 4years. There is a shortfall of £5,524 which has to be generated in year 5.

 

£5,524         365 days

———     x                       =   17 days

£117,590

 

The discounted payback period is 4yrs. 17 days.

 

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