What is Discounted Payback Period Calculator?
Discounted Payback Period Calculator which is in short DPP, sets to calculate the required period of time until the initial capital invested in a firm, returns through cash flows. In other words Discounted payback period calculator is to estimate how long it takes to break even from the money which has been once invested.
Discounted Payback Period Calculator is designed in a way to both temporal and financial variables, which will be of help in analyzing the effect of each on discounted period payback. With regard to the fact that through every investment, money may be subject to depreciation, Discounted Payback Period Calculator focuses on the time value of money as an important metric.
How Does the Tool Work?
Discounted Payback Period Calculator consists of 7 metrics to be taken into consideration. Each item represents an influential factor that will make a change in the final result. The Items to be into account are as follows:
Initial Investment
The first item to pay attention to in is the initial investment in Dollars. Since you need to know the value of the money he money you have once invested overtime, the subsequent metrics deal more with temporal features.
Number of Years
You need to insert the number of years during which you are going to have the money back through cash flows.
Discounted rate
As one of the key features of Discounted Payback Period Calculator, the discounted rate actually refers to the rate of interest which has been already applied to discounted cash flows and indicates the current value of the subsequent cash flows.
Regular Payback
Depending on how the capital is going to be returned to break even from the investment you have made in the past, cash flows can happen in a regular manner (monthly cash flows) or irregularly. Therefore you can choose yes if a regular one exists, and “No” if it doesn’t.
Annual Cash Flow
It refers to the cash flows that return either regularly or irregularly. This option gives the Discounted payback period calculator , enough information regarding the yearly paybacks.
Additional deposits
Discounted payback period calculator shows the necessity of extra deposits in order to cover a raise or drop in expenses due to new services. In other words, upon investing there could have been services that have been underestimated or those which are currently non-exist. Discounted payback period calculator provides users with an option that can include an increase or decrease in deposits.
Discounted payback period calculator formula
The formula is composed of two parts:
The year before the Discounted Payback Period
In this formula, The general cash flow in the year before recovery is divided by the cash flows in the year after recovery. In other words, the period before the cash flows start will be divided by the discounted value of the cash flow referring to the period when the total cash flow is zero. Business people should deduct the rate of future cash flows from the present value of it.
Although the discounted payback period calculator is designed to provide users with convenience in calculating in such a complicated procedure, having an idea about the formula aids users in learning about how the procedure goes and why each variable exists in this formula. The Discounted payback period calculator works the following formula.
DPP = y + abs(n) / p
In this formula, “y” stands for the period before the one in which the cash flows become positive. The abbreviation “abs” represents the value of the discounted cash flow in the period which was already mentioned as “y”. Finally “p” is the discounted value of the cash flow, in a period when cash flow is less than/ or equal to zero.
Advantages of Discounted Payback Period Calculator
As a capital budgeting tool, there are several advantages to using this tool. In comparison to discounted payback tools, Discounted Payback Period Calculator considers time an important factor in the value of money. Since there are successive cash flows and the cash flows are positive, this method is more favorable than the former one.
Another upside to taking this into account is that this discounted payback period calculator compares how long the project will last and how frequent the cash flows will be. This way the time value of money will not be disregarded as well.
Advantages of Discounted Payback Period Method
As a method that is frequently used by businesses, it can provide business people with enough insight regarding whether to accept projects or not. This discounted payback period calculator helps business people decide more accurately and evaluate the profitability of a business by taking the time value of the money into account.
How Is the Discounted Payback Period Calculated?
The Discounted payback period calculator is the period of time that will be needed for an investment to break even from the original investment. To calculate it, first, the cash flows which will be made subsequently should be discounted and next the value of future cash flows will be added up.
How is the Payback Period calculated?
To calculate PayBack Period, the cost of the investment should be divided by the average yearly cash flow. According to this formula, businesses prefer the payback period to be shorter. As a result of a shorter payback period, the business will be more profitable.
How should businesses evaluate the results of Discounted Payback Period?
The results achieved from the Discounted payback period calculator can be either positive or negative. A positive rate can be interpreted as the success the company has had in gaining capital. A negative number, on the other hand, shows the money which has not been regained through cash flows yet. While the former case indicates a profitable business, the latter shows the opposite.
Why is it useful to use Discounted Payback Period Calculator?
Calculating using Discounted payback period calculator is both complicated and time-consuming. Using the Discounted Payback Period Calculator, however, is both accurate and fast.
Frequently Asked Questions (FAQs)
The Discounted payback period calculator is the period of time that will be needed for an investment to break even from the original investment. To calculate it, first, the cash flows which will be made subsequently should be discounted and next the value of future cash flows will be added up.
To calculate PayBack Period, the cost of the investment should be divided by the average yearly cash flow. According to this formula, businesses prefer the payback period to be shorter. As a result of a shorter payback period, the business will be more profitable.
Calculating using Discounted payback period calculator is both complicated and time-consuming. Using the Discounted Payback Period Calculator, however, is both accurate and fast.
