Discounted payback period
Discounted payback applies the time value of money before determining when the investment is recovered. Calculate each cash flow's present value at the required rate and accumulate the results. A project can recover its undiscounted cost but never achieve discounted payback. This method still ignores cash flows after the recovery date and requires an arbitrary acceptance period. Fractional-year answers commonly interpolate within a year; identify that assumption because year-end cash flows do not literally arrive evenly. Discounted payback and a risk-adjusted payback target are separate ideas.
Worked example
A $100 investment produces $60 at each of years 1 and 2. At 10%, discounted inflows are $54.55 and $49.59. The classroom interpolation is 1 + 45.45/49.59 = approximately 1.92 years; with strictly year-end receipts, actual recovery occurs at the end of year 2.
Common mistake
Calling every shorter risk-adjusted payback target 'discounted payback'; discounting cash flows and changing the target are different adjustments.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FM | Direct | September 2026–June 2027 |