This video shows an example of how to calculate the discounted payback period for an investment.

The discounted payback method is a decision rule that says a project should only be accepted if the discounted cash inflows are cover the cost of the initial investment within a certain period of time. For example, a company might say that it only invests in projects that pay back within 18 months. The payback period for a project would be calculated (after discounting the cash flows) and then compared to the threshold set by the company.

The discounted payback method is the same as the payback method, with the only exception being that the discounted payback method accounts for the time value of money by discounting the project’s cash flows to the present value.