This Discounted Payback Period Calculator (DPB Calculator) is a tool which will allow you or your team to quickly ascertain the payback timeframe in years, for an investment. The usual timing for undertaking this measurement procedure is in the capital budgeting phase, where the quantification of the value that an investment or project will add to a business. The DPB calculator joins the internal rate of return calculator (IRR calculator) and the net present value calculator (NPV calculator) as the three main performance measurement approaches to capital-based budgeting. As the payback period timeframe itself does not necessarily reflect the importance of the value of the decision, it is the least used of the three unless the liquidity of the project is the primary concern, then it becomes the most valuable of the three metrics.
The difference between the DPB calculator and the other two is that this measure gives the result of the break-even period (payback period) in time, usually in years, whereas, the others give a percentage or nominal currency-based return.
The payback period in this instance refers to the timeframe in which the recouping of the full value of the original investment occurs, based on the discounted cash flow rate per period until that point. Most calculations do not take into account the salvage value of the asset itself, however, this depreciation calculator will allow for that separate calculation to be undertaken if you want to fund the asset end of life salvage cost.
The example below will show exactly how this works using the same example that was previously used in the NPV and IRR calculations.
In the other examples, we saw that Machine A and Machine B had different cashflows for their respective years. For this example, we will take the average yearly incoming cash flow amount for the two machines. We will also use the same discount rate of 10%. The 'Discount Rate' is the rate of interest or the rate of return which is either owed each period for the loan or which could be gained each period via alternative investments.
For Machine A the machine cost was $150,000 and the average yearly cash flow is $51,000 [($30,000 + $35,000 + $45,000 + $60,000 + $85,000)/5]. Based on this, we would use $51,000 as the cash flow per year.
For Machine B the machine cost was $250,000 and the average yearly cash flow is $80,200 [($55,000 + $65,000 + $77,000 + $99,000 + $105,000)/5]. Based on this, we would use $80,200 as the cash flow per year.
The result of the comparison of these two scenarios shows that the payback period for Machine A is 3.67 years, and the payback period for Machine B is 3.92 years.
In this case, the DPB calculation shows that the payback for Machine A is more favourable.
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