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In determining a payback period, the discounted payback period is employed in capital budgeting decisions to determine the present value of each cash flow.
The discounted payback time is a capital planning process used to estimate a project's profitability. A discounted payback period expresses the number of years required to recoup the initial investment by discounting future cash flows and accounting for the time value of money. The measure is used to assess a project's viability and profitability.
Since it assumes only one upfront investment and does not account for the time value of money, the more simplified payback period formula, which simply divides the total cash outlay for the project by the average annual cash flows, does not provide an accurate answer to the question of whether or not to take on a project.
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