imported>Doug Williamson |
imported>Doug Williamson |
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| Discounted payback is a variant of the [[payback]] method of investment appraisal.
| | ''Law.'' |
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| Under discounted payback, the amounts of money arising in different time periods are discounted to their present values.
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| '''Example'''
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| A proposal requires an initial investment of $100m at Time 0 years,
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| and will then pay out annual amounts of $10m, $20m, $30m, $40m, $50m and $60m,
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| at future Times 1 to 6 years respectively.
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| The relevant cost of capital is 10% per year.
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| The cumulative discounted net cash flow and discounted payback period are calculated as follows:
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| <u>Discounted cash flows:</u>
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| '''Time 0:''' (100) x 1.10<sup>0</sup>
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| = $(100)m.
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| '''Time 1:''' 10 x 1.10<sup>-1</sup>
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| = $9.09m.
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| '''Time 2:''' 20 x 1.10<sup>-2</sup>
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| = $16.53m.
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| '''Time 3:''' 30 x 1.10<sup>-3</sup>
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| = $22.54m.
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| '''Time 4:''' 40 x 1.10<sup>-4</sup>
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| = $27.32m.
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| '''Time 5:''' 50 x 1.10<sup>-5</sup>
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| = $31.05m.
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| <u>Cumulative discounted cash flows:</u>
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| '''Time 0:''' (100).
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| '''Time 1:''' (100) + 9.09
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| = $(90.91)m.
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| '''Time 2:''' (90.91) + 16.53
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| = $(74.38)m.
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| '''Time 3:''' (74.38) + 22.54
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| = $(51.84)m.
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| '''Time 4:''' (51.84) + 27.32
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| = $(24.52)m.
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| '''Time 5:''' (24.52) + 31.05
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| = +$6.53m.
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| The initial investment has paid back by the end of 5 years, so the payback period to the nearest whole year is 5 years.
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| It is also possible to calculate a more refined estimate using interpolation between 4 years and 5 years. Interpolation assumes that the cash flows arise evenly over the course of the 5th year.
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| This method removes some of the problems of the simple payback method. But it still leaves significant problems and simplifying assumptions.
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| | In commercial law, the failure to honour a negotiable instrument. This may be by non-acceptance, or by non-payment. |
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| == See also == | | == See also == |
| * [[Payback]] | | * [[Negotiable instrument]] |
| * [[Present value]]
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| [[Category:Corporate_finance]]
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