Corporate finance
What is discounted payback?
Discount each annual flow to time zero, then find when cumulative present value first offsets the outlay.
Definition
Discount each annual flow to time zero, then find when cumulative present value first offsets the outlay.
Intuition
A later payment usually contributes less present value toward recovering today's outlay.
Formula
Discount annual flows first, then interpolate within the first recovery year.
Variables and limits
CFₜ is the year-end cash flow, r a constant annual discount rate, and t starts at 1. Fractional recovery interpolates within a year's discounted flow; exact payment timing, variable rates, and post-recovery flows are outside the metric.
Example
- Enter initial investment 1,000, two annual flows of 600, and a 10% discount rate.
- Discounted flows are 600/1.1 ≈ 545.45 and 600/1.1² ≈ 495.87.
- Payback is 1 + (1,000−545.45)/495.87 ≈ 1.92 years.
Common mistakes
Do not mix discounted and raw flows in the cumulative sum or overlook value after recovery.
Frequently asked questions
What happens at a zero discount rate?
Each discount factor is one, so it equals simple payback.
What if discounted flows never recover the outlay?
It shows not recovered instead of a made-up year; extend the forecast or inspect total value with NPV.
Can this replace NPV?
No. Discounted payback still ignores flows after recovery, while NPV includes the full forecast.