What is a discounted return period?

The term 'discounted return time' concerns the method used in capital budgeting to determine the profitability of the project. Company managers can use it to decide whether to accept a project. In principle, this calculates the time to take the project to generate sufficient inflows of cash in order to compensate evenly, and take into account the time value of the money. For example, at the beginning of the project, which is expected to create the following annual influx of $ 10,000 (USD) in the first five years, which is expected to create the following annual influx of cash in the first five years: $ 2,000, $ 2,500, $ 3,000, $ 3,500 and $ 4,000. At the end of the third year, the project will generate $ 7,500. Restoring the last $ 2,500 (as $ 2,500 / $ 3,500 = 0.71), so the return period of this project is 3.71 years.

A simple return period, even if it is useful, has a problem ignoring the time value of money. The concept of time value of money dictates that uToday, the amount of money is more valuable than the same amount of money in the future for inflation and the possibility of investing money today to generate more money in the future. The discounted return time will solve this problem by calculating the future influx of future cash before determining the return period to calculate its current values.

Suppose the required return of the project is 12 percent, so each cash flow is discounted by 12 percent per year. The project's expected cash flows have the following current values: $ 1,785.71 USD USD (from $ 2,000/1,12), $ 1,992,98 ($ 2,500/$ 1,12

), $ 2.135.34 (from $ 3,000/$ 1,12), $ 2.124,31), $ 2,135.34 $), 2.135.34 USD/$ 1.12 $ 3,000 USD/$ 1.12

4

) and $ 2,269.71 (FROM $ 4,000/$ 1,12 5

). At the end of the fourth year, the project will generate $ 8,138.34. The project will restore the rest of the initial expenditure for 0.82 years (because 1,861.66 USD / 2 269.71 USD = 0.82), so discounted present value PRO This project is 4.82.

discounted cash flows are always smaller than undisputed cash flows, so the discounted return period is always longer than a simple return period. The discounted return time solves one problem with a simple return time, but still has a problem. It ignores cash flows after a return period, so the manager can reject long -term projects that are profitable in later years if he uses the discounted period of return as the basis for his decision.