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Good afternoon Sir,
I have a question in relation to (adjusted) Payback period calculation.
If the question doesn’t specify the timing of the CFs ( i.e. Start of the Year(evenly distributed) or End of the Year), what should be the default assumption ?
I am asking as if the CFs occur at the beginning of the year & we want to calculate the exact period it takes to pay off the initial investment, we can calculate Year & Month ( let’s say it pays off after 3y & 7 months). But if the CFs occur at the end of the year, the answer to this hypothetical question would be 4years.
So, if we aren’t told in the question when the CFs occur…what should we assume ?
Thank you in advance,
AlessyaI do not know what you mean by ‘adjusted’ payback period – there is no such term.
If you mean the discounted payback period, then you assume that the flows occur at the end of years.
If you mean the normal (not discounted) payback period, then you assume that the flows occur evenly over the year.
Apologies, as you correctly assumed, I meant “Discounted” (rather than adjusted).
Your answer has completely clarified my confusion. Thank you very much for your prompt response.
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