Formula for Calculating Discounted Payback Period. How Project Management Software Improves Productivity, Estimating Activity Durations: Definition, Methods, Practical Uses, Bottom-Up Estimating – Definition, Example, Pros & Cons, Performance Prism for Performance & Stakeholder Management, Balanced Scorecard in Project Management – Uses, Pros & Cons, Number of Communication Channels (+ PMP® Formula & Calculator), How to Do Analogous Estimating – an Illustrated 5-Step Guide. The DPP can be used in a cost-benefit analysis as well as for the comparison of different project alternatives. number since it is an outflow), the discount rate and the positive or negative The relevant rows – the years, the flows that increase significantly over time. The calculation is done after considering the time value of money and discounting the future cash flows. That said, an even better calculation to use in many instances is the net present value calculation. Calculate the cumulative discounted cash flows: What Is the Weighted Average Cost of Capital? discount rate. In other words, the investment will not be recovered cash flows at face value. Consequently, it is not the best method to use when choosing an investment project. rate which can be either a market interest rate or an expected return. The discount rate was set at 12% and Here are the steps you use to calculate the discounted payback period: Discounted payback period (DPP) occurs when the negative cumulative discounted cash flows turn into positive cash flows which, in this case, is between the second and third year. To calculate the discounted payback period, firstly we need to calculate the discounted cash inflow for each period using the following formula: Discounted Cash Inflow = Actual cash inflow / (1 + i) n, eval(ez_write_tag([[250,250],'efinancemanagement_com-medrectangle-3','ezslot_2',116,'0','0']));Here,  i refers to the discount rate, andn refers to the period for which the cash inflow relates. In other words, DPP is used to The cumulated discounted cash flow becomes It does not consider the project that can last longer than the payback period. What Are Leads and Lags in Project Management? of the DPP, 2 examples as well as a discounted payback period calculator. The formula to find the exact discounted payback period follows: Using our example above, the precise discounted payback period (DPP) would equal 2 + $2,148.76/$2,253.94 or 2.95 years. a series of cash flows of up to 6 periods. This flaw overstates the time to recover the initial investment. Its calculation can be problematic where multiple negative cash flows are incurred during the investment period. weighted average cost of capital. If DPP were the only relevant indicator, In this example, the cumulative discounted within the time horizon of this projection. alternative to the payback period if the time value of money or the expected remains constant for all periods. period in which the cumulative cash flow turns positive) which is year 5 in What Is the Discounted Payback Period (DPP)? Although it is not explicitly mentioned in the Project Management Body of Knowledge (PMBOK) it has practical relevance in many projects as an enhanced version of the payback period (PBP).

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