Discounted Payback Period

Discounted payback period discounts each year’s cash flow at the project’s discount rate before adding it to the running total, then finds when that discounted total turns positive. Because discounting shrinks every future cash flow, discounted payback is always at or later than simple payback, and it can show a project never pays back at all on a discounted basis even when it does on an undiscounted one.

It is a more conservative liquidity screen than simple payback, though like simple payback it still ignores everything that happens after the payback point, which is why neither replaces NPV or IRR for a full accept-or-reject decision.