The discounted payback period adjusts for the time value of money: a dollar received 3 years from now is worth less than a dollar today. This makes the discounted version more conservative — and more accurate for long-horizon investments.
The formula
For each year, discount the cash flow: PV of Year N = Annual Cash Flow / (1 + Discount Rate)^N
Then accumulate discounted cash flows until they exceed the initial investment.
Worked example
Investment: $200,000. Annual cash flow: $80,000. Discount rate: 10%.
| Year | Cash Flow | Discount Factor | PV | Cumulative PV |
|---|---|---|---|---|
| 1 | $80k | 0.909 | $72,727 | $72,727 |
| 2 | $80k | 0.826 | $66,116 | $138,843 |
| 3 | $80k | 0.751 | $60,105 | $198,948 |
| 4 | $80k | 0.683 | $54,641 | $253,589 |
Break-even occurs partway through year 3 (at ~$198k, just under $200k) — so discounted payback ≈ 3.02 years vs 2.5 years simple.
When to use discounted payback
Use discounted payback for: - Any investment with a payback period over 2 years - High-cost capital investments where inflation matters - Decisions where the cost of capital is meaningful (> 5%)
For quick marketing investment decisions, simple payback is usually sufficient.
Calculate both at the Payback Period Calculator.