## Discounted Payback Period

This method is the same as the ordinary Payback Period, except that the cash flows are first discounted at a predetermined rate before the cumulative recovery of the initial outlay is measured. The period so obtained is the discounted payback period.

### Why it exists

Simple payback ignores the time value of money. Discounting the inflows corrects this, giving a more conservative (longer) payback estimate.

### Key insight

The higher the required rate of return, the greater the gap between simple payback and discounted payback — because later cash flows are discounted more heavily and contribute less to recovery.

### Decision rule

Accept if the discounted payback is within the firm's acceptable maximum period; for ranking, prefer the shorter discounted payback.

Worked example

### Example 1

Example — simple vs discounted payback

A ₹30,000 outlay generates ₹6,000 per year. Simple payback = 30,000 / 6,000 = 5 years.

Now discount the inflows at a 15% required rate:

Year	Cash Flow (₹)	PVF@15%	PV (₹)	Cumulative PV (₹)
1	6,000	0.870	5,220	5,220
2	6,000	0.756	4,536	9,756
3	6,000	0.658	3,948	13,704
4	6,000	0.572	3,432	17,136
5	6,000	0.497	2,982	20,118
6	6,000	0.432	2,592	22,710
7	6,000	0.376	2,256	24,966
8	6,000	0.327	1,962	26,928
9	6,000	0.284	1,704	28,632
10	6,000	0.247	1,482	30,114

The cumulative discounted cash flow crosses ₹30,000 only at year 10 (₹30,114). So discounted payback ≈ 10 years, versus 5 years on a simple basis — the time value of money roughly doubles the apparent recovery time here.

⚠️ Common exam mistakes

Using undiscounted cash flows for the cumulative total — that gives ordinary payback, not discounted payback.
Forgetting that discounted payback is always longer than (or equal to) simple payback, never shorter.
Like simple payback, ignoring cash flows that occur AFTER the payback point — the method still disregards post-payback profitability.

Reference:

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Discounted Payback Period Method

Worked example

⚠️ Common exam mistakes