BAR Capital Budgeting · Updated November 2026
Payback or Discounted Payback: Are You Ignoring the Time Value of Money?
Both methods ask how long it takes to recover the initial investment, but only discounted payback recognizes time value of money.
Payback period
Adds undiscounted project cash inflows until the initial investment has been recovered.
Discounted payback
Discounts each cash flow before accumulating it toward recovery of the original investment.
Shared limitation
Both methods can ignore valuable cash flows received after the recovery point.
Use with NPV
A project can have an attractive payback but still be inferior under NPV, so payback should not replace a full value analysis.
The takeaway
Ordinary payback is simpler but ignores discounting. Discounted payback is more economically meaningful but still ignores cash flows after the cutoff point.
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FAQ
Does ordinary payback use present values?
No.
Does discounted payback use present values?
Yes.
Do either methods fully capture all post-payback cash flows?
No.