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I found that duration to recover investment and discounted payback period gives different answer. This two appraisal method seems very similar to me. discounted payback period gives the time to recover investment and duration gives the AVG. time to recover.
Exactly what it means by average time ? What’s the implication of duration compared to discounted payback period in project appraisal?
I would be grateful if you please clarify the above point. Thanks.
They will not give the same results (even though there is obviously some similarity in the arithmetic).
The duration is really used for bonds, and gives measure of the sensitivity of the price to changes in yield.
The discounted payback period is an aid to investment appraisal – the shorter the duration the better in that there is less risk (due to the fact that the earlier flows are likely to be more certain that the later ones).
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Just one more question on Macaulay’s duration: what is the practical use of it? As I undestood, the longer the duration the more sensitive the market price of a bond to changes in investors’ required return. But can’t we just compare, for example, two bonds redeemable in 5 and 10 years and come to conclusion that the latter’s market price is more sensitive?
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