Should Payback Be Discounted?

The shorter a discounted payback period is means the sooner a project or investment will generate cash flows to cover the initial cost. A general rule to consider when using the discounted payback period is to accept projects that have a payback period that is shorter than the target timeframe.

Is discounted payback better than payback?

Payback period does not account for the effect of time value of money. Discounted payback period accounts for the effect of time value of money. Discounted payback period uses discounted cash flows, thus is more accurate compared to payback period.

Why is discounted payback important?

Advantages. Discounted payback period helps businesses reject or accept projects by helping determine their profitability while taking into account the time-value of money. This is done via the decision rule: If the DPB is less than its useful life, or any predetermined period, the project can be accepted.