Discounted Payback Period Rule

Discounted payback period rule

An investment decision rule in which cash flows are discounted at an interest rate and then one determines how long it takes for the sum of the discounted cash flows to equal the initial investment.

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Discounted Payback Period Rule

In investment decisions, the number of years it takes for an investment to recover its initial cost after accounting for inflation, interest, and other matters affected by the time value of money, in order to be worthwhile to the investor. It differs slightly from the payback period rule, which only accounts for cash flows resulting from an investment and does not take into account the time value of money. Each investor determines his/her own discounted payback period rule and, as such, it is a highly subjective rule. In general, however, short-term investors use a short number of years ? or even months ? for their discounted payback period rules, while long-term investors measure their rules in years or even decades.