Dynamic payback period method – investment projects z gas el salvador empleos


The static payback period method has already been discussed in Section 2.4, and the statements made there can largely be transferred to the dynamic payback period (DPP) method. As is true also for the static version, the DPP calculation should not be the sole criterion used to assess investment projects, but it can act as a supplement to other approaches. hp gas online For the DPP approach:

The DPP method does not necessarily lead to the same results for absolute or relative profitability as the NPV method. Whether results differ for absolute profitability depends on the designated time limit as well as on the cash flows for the last period(s). Identical results are obtained if the designated time limit is assumed to be the project’s economic life. Differences in comparing relative profitability, however, can result from cash flows that occur after the payback period has been achieved, as the DPP method does not systematically account for these subsequent cash flows.

The determination of the DPP involves calculating the NPV of the project as at the end of every period of its economic life. As long as this value remains negative, the payback period is not yet reached. When this value reaches zero (or becomes positive for the first time), the payback period is achieved (or exceeded). gasbuddy near me If the first non-negative value exceeds zero, then payback is achieved somewhere within that last period to be considered. The part of that period (year) which must pass before payback is achieved can be approximated by interpolation. Example 3-4

The table lists the net cash flows for each period, the present value of the discounted net cash flows and the cumulative NPVs. The DPP is exceeded in this example after four periods, because the cumulative NPV becomes positive. So, the DPP is achieved at a point in time somewhere between 3 and 4 years after the start of the project. gas station To approximate the actual DPP, the following linear interpolation formula may be used. gas problem in babies Here t* indicates the period of the last cumulated negative net present value:

When using this interpolation it is assumed that cash flows occur in a linear fashion, i.e. evenly throughout each year. In the example above, a proportion (but not all) of year 4’s discounted cash flow of €23,520.96 is required before payback is achieved. The amount required is €20,569.77 (i.e. the amount outstanding at the end of year 3). It may be assumed that this proportion of the year 4 cash flow corresponds to an equivalent proportion of time elapsed during year 4. Using this assumption, the DPP of the investment project A (DPPA) is approximated as:

For project B (see Example 3-1) the DPP may be determined in the same way. thitima electricity sound effect It amounts to approximately 2.78 years. In contrast to the results of the NPV calculation, project B appears to be relatively profitable. Absolute profitability depends on the designated time limit. If 4 years is used, for example, then both projects are absolutely profitable. 4 gas giants If the time limit was set at 3 years instead, then only project B would be judged absolutely profitable using the DPP criterion. Assessment of the method

Compared to the SPP method, the dynamic model has the advantage of using discounted cash flows. But, it still shares some of the limitations of the static model. A crucial problem is the omission of all cash flows occurring in periods after the DPP is achieved, which may be substantial for some long-running projects. Because of this limitation the DPP, like the SPP model, mainly serves as a measure of the risk connected with an investment project (in terms of the time needed to recover the investment outlay), but it is unsuitable as an exclusive decision criterion. However, it should be pointed out that the payback period represents a critical value of the economic life in the NPV model (this will be discussed further in Section 8.3).