d Payback System (DPS) of evaluating capital investments are a shade better than the payback system since the former also considers the time value of investments. It is “An Investment decision rule in which Cash flows are discounted at an Interest rate and one determines how long it takes for the sum of the discounted cash flows to equal the initial investment.” (Investing glossary: Discounted payback period rule, 2010).
Fundamentally speaking, the DPS considers the time frame within which the investment outlay is recompensed to the promoters through cash inflows. When comparing different investment options, the Finance Director would seek to choose such projects in which the discounted payback period is lower, since these would be more economically viable for the company, in terms of returns on investments. However, there are also a host of factors and variables that also need to be considered.
Investments for this project: G$ 900m excluding documentation and working capital costs. It is necessary to conduct computation of Payback discount in order to decide whether this investment would be able to payback at the end of seven years.
From the above chart it is evident that even after the 7th year, the discounted inflows have not been able to meet the primary cost of investments and at the end of the 7th year there is still an uncovered deficit of G$ 87 m ( 900- 813).
Thus from the point of view of the Payment discount method, this project does not seem to be viable as it cannot meet the criteria of paying back investments within the first 7 years of the workings of the project. Project got rejected under Project discount method.
method, in the event of a positive cash outflow, this project may be considered as a viable and feasible option. “The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.” (Net present value – ...
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