Discounted Payback Period

Discounted Payback Period - Discounted Payback Period One...

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Discounted Payback Period One of the major disadvantages of simple payback period is that it ignores the time value of money. To counter this limitation, an alternative procedure called discounted payback period may be followed, which accounts for time value of money by discounting the cash inflows of the project. Formulas and Calculation Procedure In discounted payback period we have to calculate the present value of each cash inflow taking the start of the first period as zero point. For this purpose the management has to set a suitable discount rate. The discounted cash inflow for each period is to be calculated using the formula: Discounted Cash Inflow = Actual Cash Inflow (1 + i) n Where, i is the discount rate; n is the period to which the cash inflow relates. Usually the above formula is split into two components which are actual cash inflow and present value factor ( i.e. 1 / ( 1 + i )^n ). Thus discounted cash flow is the product of actual cash flow and present value factor. The rest of the procedure is similar to the calculation of

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This note was uploaded on 04/03/2012 for the course ACCT 275 taught by Professor Stangota during the Spring '09 term at Rutgers.

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Discounted Payback Period - Discounted Payback Period One...

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