Site Search

Course Navigation


Home| Course Catalog| Career Planning

FREE online courses on Capital Budgeting Analysis - Three Economic Criteria for Evaluating Capital Projects - Discounted Payback Period

 

The final economic criteria we will use is the Discounted Payback Period. Payback refers to the number of years it takes to recover our net investment. In our previous example (Example 6), we could use a simple payback calculation as follows:

 

$ 24,100 / $ 5,788 = 4.2 years

 

However, this method does not recognize the time value of money and as we previously indicated, we must consider the time value of money because of inflation, uncertainty, and opportunity costs. Therefore, we will use the discounted cash flows to calculate the payback period (discounted payback period).

 

Example 14 - Calculate Discounted Payback Period

 

Referring back to Example 6, we can calculate the discounted payback period as follows:

 

Year    Cash Flow  x  P.V. Factor  = P.V. Cash Flow  Total to Date

   1     $ 5,788                   .893             $ 5,169                       $  5,169

   2        5,788                  .797                4,613                     9,782        

   3        5,788                  .712                4,121                        13,903

   4        5,788                  .636                3,681                         17,584

   5        5,788                  .567                3,282                        20,866

   5        3,250                  .567                1,843                        22,709   

 

Under the Discounted Payback Period, we would never receive a payback on our project; i.e. the total to date present cash flows never reached $ 24,100 (net investment). If we had relied on the regular payback calculation, we would falsely assume that this project does payback in the fourth year.

 

In summary, we use economic criteria that have realistic economic assumptions about capital investments. Three economic criteria that meet this test are:

 

Net Present Value

 

Modified Internal Rate of Return

 

Discounted Payback Period

 

 

 

Our Network Of Sites:
Apply 4 Admissions.com              | A2ZColleges.com  | OpenLearningWorld.com  | Totaram.com
Anatomy Colleges.com                | Anesthesiology Schools.com  | Architecture Colleges.com | Audiology Schools.com
Cardiology Colleges.com            | Computer Science Colleges.com| Computer Science Schools.com| Dermatology Schools.com
Epidemiology Schools.com         | Gastroenterology Schools.com  | Hematology Schools.com     | Immunology Schools.com
IT Colleges.com                | Kinesiology Schools.com  | Language Colleges.com  | Music Colleges.com
Nephrology Schools.com             | Neurology Schools.com  | Neurosurgery Schools.com | Obstetrics Schools.com
Oncology Schools.com    | Ophthalmology Schools.com | Orthopedics Schools.com       | Osteopathy Schools.com
Otolaryngology Schools.com| Pathology Schools.com  | Pediatrics Schools.com  | Physical Therapy Colleges.com
Plastic Surgery Schools.com| Podiatry Schools.com  | Psychiatry Schools.com   | Pulmonary Schools.com 
Radiology Schools.com| Sports Medicine Schools.com| Surgery Schools.com | Toxicology Schools.com
US Law Colleges.com| US Med Schools.com | US Dental Schools.com

About Us Terms of Use | Contact Us | Partner with Us | Press Release | Sitemap | Disclaimer | Privacy Policy


©1999-2011 OpenLearningWorld . com - All Rights Reserved