Discounted payback period
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The discounted payback period is the amount of time that it takes to cover the cost of a project, by adding positive discounted cash flow coming from the profits of the project. The advantage of using the discounted payback period over the payback period is that it takes into account time value of money.
Decision making using the discounted payback period
When using the discounted payback period for decision making, a firm must first determine a discount rate at which to discount the future cash flow values of a specified period of time. For example, they could discount the future cash flows for the next 4 years. Once the discounted cash flow values have been calculated they should be positive values. After that you follow the same procedure you would to calculating the payback period. The discounted payback period should be in terms of years. If the discounted payback period is less than the predetermined period of time then the decision rule is to accept the project. On the other hand, if the discounted payback period is greater than the predetermined period then the decision rule would be to reject the project.
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