You are considering a project with an initial cash outlay of $80,000 and expected cash flows of $20,000 at the end of each year for six years. The discount rate for this project is 10 percent. What are the project’s payback and discounted payback periods?

11–24. Payback period, Net Present Value, Profitability Index, etc.

Payback periods are the time required to recover initial investment through cash flow generated by a particular project. This would mean that the payback time is four years because it takes $80,000 divided by $20,000.

It is calculated by discounting the future cash flows to determine their current value. We can estimate the discounted period for this project using a 10% rate. The result is 3,81 years. It means that, when discounting for time value, it takes only 3.81 years to recover all of the investment in this project.

Using both these metrics allows investors and other stakeholders to assess how long it will take for an organization’s capital invested in a particular project or venture to return its original cost as well as any additional costs associated with inflation or opportunity costs over a specific timeframe from start-up until completion/termination which provides them with valuable information they can utilize while making decisions related to potential investments