Discounted Payback Period

Capital Budgeting
Updated Apr 2026 • Has calculator

The time to recover the initial investment using present-value-adjusted cash flows.

What is Discounted Payback?

The discounted payback period improves on the simple payback period by discounting each future cash flow to present value before accumulating them. This means the discounted payback is always longer than the simple payback period because the discounted cash flows are smaller. If a project pays back within its life even on a discounted basis, it is guaranteed to have a positive NPV up to the payback date. Although discounted payback still ignores cash flows after the cutoff date, it is a useful risk screen that combines the intuitive appeal of payback analysis with the economic realism of discounting.

Formula

Discounted Payback = Year when Σ [CFᵢ ÷ (1+r)^i] ≥ 0

Worked Example

Worked example — Capital Project — CFA Curriculum Illustration

Same 5-year project at 10% hurdle rate

Step 1  Discounted CFs: $109.1K, $124.0K, $135.2K, $109.3K, $80.7K (years 1–5 at 10%)
Step 2  Cumulative discounted: −$390.9K → −$266.9K → −$131.7K → −$22.4K → +$58.3K
Step 3  Balance entering year 5: −$22,400; discounted CF in year 5: $80,700
Step 4  Discounted payback = 4 + ($22,400 ÷ $80,700) = 4 + 0.28 = 4.28 years
Step 5  → On a discounted basis the project breaks even after ~4.28 years vs. 3.31 undiscounted

Source: CFA Institute — Corporate Finance, 4th ed., Capital Budgeting (2024-01-01)

Calculate Discounted Payback

Enter comma-separated cash flows starting at t=0. CF₀ must be negative. E.g.: -500000, 120000, 150000, 180000, 160000, 130000

Cost of capital or hurdle rate

Discounted Payback Period

—

Not investment advice.

How to Interpret Discounted Payback

< 2
< 2 Years — very fast discounted payback
2 – 4
2–4 Years — acceptable discounted payback
4 – 6
4–6 Years — longer horizon; higher uncertainty
> 6
> 6 Years — extended discounted payback; high risk

📚 Capital Budgeting — Complete the path

  1. NPV
  2. IRR
  3. MIRR
  4. Payback Period
  5. Discounted Payback
  6. Profitability Index
Sources
  1. CFA Institute — Corporate Finance, 4th ed., Capital Budgeting
  2. Brealey, Myers & Allen — Principles of Corporate Finance, 13th ed.
  3. Investopedia — Discounted Payback Period