imported>Doug Williamson |
imported>Doug Williamson |
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| Discounted payback is a variant of the [[payback]] method of investment appraisal.
| | '''F'''inancial '''I'''nstitution. |
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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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| 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.
| | == See also == |
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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)m x 1.10<sup>0</sup> = $(100)m.
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| Time 1: $10m x 1.10<sup>-1</sup> = $9.09m.
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| Time 2: $20m x 1.10<sup>-2</sup> = $16.53m.
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| Time 3: $30m x 1.10<sup>-3</sup> = $22.54m.
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| Time 4: $40m x 1.10<sup>-4</sup> = $27.32m.
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| Time 5: $50m x 1.10<sup>-5</sup> = $31.05m.
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| <u>Cumulative discounted cash flows:</u>
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| Time 0: $(100)m.
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| Time 1: $(100)m + $9.09m = $(90.91)m.
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| Time 2: $(90.91)m + $16.53m = $(74.38)m.
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| Time 3: $(74.38)m + $22.54m = $(51.84)m.
| | * [[FHC]] |
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| Time 4: $(51.84)m + $27.32m = $(24.52)m.
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| Time 5: $(24.52)m + $31.05m = +$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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| == See also ==
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| * [[Payback]] | |
| * [[Present value]]
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| [[Category:Corporate_finance]] | | [[Category:Compliance_and_audit]] |
