What is Discounted Payback Period?
The discounted payback period is the time it takes for a project’s discounted cash flows to repay the initial investment. It improves on the simple payback period by accounting for the time value of money.
How It Works
- Discount each year’s cash flow back to present value using the cost of capital
- Add the discounted flows cumulatively until they equal the initial investment
- The point at which they break even is the discounted payback period
- Best used as a screening or risk filter, alongside NPV and IRR
- Penalizes projects with cash flows that arrive late, which is often appropriate for risky projects
Saudi Context
For Saudi infrastructure or industrial projects with long horizons, the discounted payback complements NPV by exposing how long capital is at risk before recovery. Lenders financing Vision 2030 projects often check this metric.
Example
A solar plant in Tabuk requires SAR 200 million upfront and returns SAR 35 million a year. At a 10% discount rate the discounted cash flows accumulate to SAR 200 million in year 9.2 — that is the discounted payback period, even though the simple payback was 5.7 years.