Discounted payback period

A real discount rate of 10% was used to convert all future expenses and savings into current dollars. This allowed calculation of the net present value of the savings and costs. Also calculated were the discounted payback period and the simple payback period. Each of these quantities was calculated over a life cycle analysis period of 20 years, the assumed life of the mechanical system. Maintenance costs were considered to remain constant in real terms. 

Figure 27 shows the discounted cash flow diagram obtained from Table 8 using the data in Table 7. A net present value of 102,462.21 is obtained at end of 15 years of useful life operation, which shows a profitable investment. Approximate discounted payback period is about eight years. Discounted... 

Figure 6.3 Evaluation of economic sustainability. OSBL, Outside the battery limits WC, working NPV, net present value FCI, fixed capital investment DPBP, discounted payback period DCFROR, discounted cash flow rate of return.

Figure XIX-12 shows the calculated discounted payback period of the NDPC versus the local tariff on potable water under different terms of crediting (interest rate on the loan was assumed to be equal to the discount rate (Rd)). The calculations were performed using the DEEP code provided by the IAEA.

FIG. XIX-12. Discounted payback period of the NDPC vs. tariff on potable water, under different interest rates on the loan (taken equal to the discount rate Rd) rental payment for the transportable reactor unit is fixed at US 12 million/year. 

Time Criterion. The discounted payback period DPBP) is defined in a manner similar to the nondiscounted version given above. 

The project with the shortest discounted payback period is the most desirable. 

For the discounted payback period and the net present value calculations, the question arises as to what interest rate should be used to discount the cash flows. This internal interest rate is usually determined by corporate management and represents the minimum acceptable rate of return that the conpany will accept for any new investment. Many factors influence the determination of this discount interest rate, and for our purposes, we will assume that it is always givem... 

Some companies use another version of the payback period method. It is called the discounted payback period method, which considers the time value of money. The discount rate that is commonly used is the cost of capital for the company. Using the previous example from the NPV section, cash flows are discounted using a 10% discount rate (Table 6.2). 

The payback period is longer when cash flows are discounted. When ranking projects based on these two variants of the payback period method, there can be conflicting rankings. The payback period method is the same as breaking even. The regular payback period method shows when cash flows equal cash outlay. Contrastingly, the discounted payback period method shows when cash flows equal cash outlay plus debt and equity costs. 

Payback period methods are quite useful to indicate the liquidity of a project, otherwise stated as, how long it will take to receive your initial investment. In these two examples, it will take payback period is found to be 5.64 years and the discounted payback period is 8.71 years, identified by the turn to positive cumulative cash flow (Table 8.8). 

Table 8.8 Payback Period and Discounted Payback Period m —1 S X...

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