Discounted payback and EC Directive 97/5EC: Difference between pages

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Discounted payback is a variant of the [[payback]] method of investment appraisal.
''European Union law.''


Under discounted payback, the amounts of money arising in different time periods are discounted to their present values. 
Related to cross-border credit transfers worth up to the equivalent of EUR 50,000 within the EU and the European Economic Area (EEA). Repealed by Directive 2007/64/EC.
 
 
For example a proposal requires an initial investment of $100m at Time 0 years, and will then pay out annual amounts of $10m, $20m, $30m, $40m, $50m and $60m at Times 1 to 6 years hence respectively. 
 
The relevant cost of capital is 10% per year.
 
 
The cumulative discounted net cash flow and discounted payback period are calculated as follows:
 
<u>Discounted cash flows:</u>
 
Time 0: $(100)m x 1.10<sup>0</sup> = $(100)m.
 
Time 1: $10m x 1.10<sup>-1</sup> = $9.09m.
 
Time 2: $20m x 1.10<sup>-2</sup> = $16.53m.
 
Time 3: $30m x 1.10<sup>-3</sup> = $22.54m.
 
Time 4: $40m x 1.10<sup>-4</sup> = $27.32m.
 
Time 5: $50m x 1.10<sup>-5</sup> = $31.05m.
 
 
<u>Cumulative discounted cash flows:</u>
 
Time 0: $(100)m.
 
Time 1: $(100)m + $9.09m = $(90.91)m.
 
Time 2: $(90.91)m + $16.53m = $(74.38)m.
 
Time 3: $(74.38)m + $22.54m = $(51.84)m.
 
Time 4: $(51.84)m + $27.32m = $(24.52)m.
 
Time 5: $(24.52)m + $31.05m = +$6.53m.
 
 
The initial investment has paid back by the end of 5 years, so the payback period to the nearest whole year is 5 years.
 
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.
 
 
This method removes some of the problems of the simple payback method.  But it still leaves significant problems and simplifying assumptions.




== See also ==
== See also ==
* [[Payback]]
* [[EC Directive 2007/64/EC]]
* [[Present value]]
 
[[Category:Corporate_finance]]

Revision as of 19:10, 13 August 2013

European Union law.

Related to cross-border credit transfers worth up to the equivalent of EUR 50,000 within the EU and the European Economic Area (EEA). Repealed by Directive 2007/64/EC.


See also