Some firms use a variant of the regular payback, the discounted payback period, which is similar to the regular payback period except that the expected cash flows are discounted by the project's cost of capital. Thus, the discounted payback period is defined as the number of years required to recover the investment from discounted net cash flows. Figure 7-3 contains the discounted net cash flows for Projects S and L,
Project S: Net cash flow |
0 |
1 |
2 |
3 |
4 |
-1,000 |
500 |
400 |
300 |
100 | |
Cumulative NCF |
-1,000 |
-500 |
-100 |
200 |
300 |
PaybackS = 2.33 years. | |||||
Project L: Net cash flow |
0 |
1 |
2 |
3 |
4 |
-1,000 |
100 |
300 |
400 |
600 | |
Cumulative NCF |
-1,000 |
-900 |
-600 |
-200 |
400 |
PaybackL = 3.33 years. |
FIGURE 7-3 Projects S and L: Discounted Payback Period
Project S: Net cash flow Discounted NCF (at 10%) Cumulative discounted NCF Paybacks = 2.95 years.
Project L: Net cash flow Discounted NCF (at 10%) Cumulative discounted NCF PaybackL = 3.88 years.
0 |
1 |
2 |
3 |
4 |
1,000 |
500 |
400 |
300 |
100 |
1,000 |
455 |
331 |
225 |
68 |
1,000 |
-545 |
-214 |
11 |
79 |
0 |
1 |
2 |
3 |
4 |
1,000 |
100 |
300 |
400 |
600 |
1,000 |
91 |
248 |
301 |
410 |
1,000 |
-909 |
-661 |
-360 |
50 |
assuming both projects have a cost of capital of 10 percent. To construct Figure 7-3, each cash inflow is divided by (1 + r)t = (1.10)t, where t is the year in which the cash flow occurs and r is the project's cost of capital. After three years, Project S will have generated $1,011 in discounted cash inflows. Because the cost is $1,000, the discounted payback is just under three years, or, to be precise, 2 + ($214/$225) = 2.95 years. Project L's discounted payback is 3.88 years:
Discounted paybacks = 2.0 + $214/$225 = 2.95 years.
Discounted paybackL = 3.0 + $360/$410 = 3.88 years.
For Projects S and L, the rankings are the same regardless of which payback method is used; that is, Project S is preferred to Project L, and Project S would still be selected if the firm were to require a discounted payback of three years or less. Often, however, the regular and the discounted paybacks produce conflicting rankings.
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You and I are aware that cash flow is king in network marketing. Just like any other business, if you don’t have cash in hand, your entire business will come to a grinding HALT! Make no mistake about this because in network marketing, if you don’t have the right mindset and you don’t keep a watchful eye on your cash flow… you will become like the rest of the network marketing failures who run into debt!