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Hi,
There was a test question in BPP revision kit: calculate payback period for an investment, and you were given cash flows for 4 years and a capital cost was something around 10%, and in the answer the cash flows were discounted by 10% and that confused me a lot, because I thought that payback method is not a cash flow discount method and it doesn`t recognize time value of money.
My answer was cumulating cash flows without discounting them, was there a mistake in revision kit or I am thinking wrong?
It depends exactly what the question asked for.
If it asked simply for the payback period, then you do not discount the cash flows.
If they asked for the discounted payback period, then you discount the cash flows first and then work out the payback period on these discounted flows.(The free Paper F2 lectures on this will help you, because this is revision of F2)
Thank you for you answer, I think this site is of a great help and your lectures are very clear to follow.
I will check if they asked about discounted payback period or not.
However it still would confuse me because of what I learned payback method does not recognize time value of money and this is one of this method`s drawbacks.
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