dpp

what is discounted payback period?

is dpp convert - ve cash flow to + ve?

and

in solution of Q2.15 part 2.
how growth for p and q calculated?

 

DPP is the time it takes for the sum of discounted cashflows to be greater than or equal to zero.

So if you have a stream of cashflows (at t= 0,1,2,3,4):

[0] -20
[1] 5
[2] 10
[3] 8
[4] 6

At 5% interest these are worth:
[0] -20
[1] 4.76
[2] 9.07
[3] 6.91
[4] 4.94

Cumulatively:
[0] -20
[1] -15.24
[2] -6.17
[3] 0.74
[4] 5.68

So the first time the sum of the discounted cashflows exceeds 0 is the DPP, or t=3 in this case.

Using a 7% interest rate would change the answer above as follows:
[0] -20
[1] 4.67
[2] 8.73
[3] 6.53
[4] 4.58

Cumulatively:
[0] -20
[1] -15.33
[2] -6.6
[3] -0.07
[4] 4.51

And in this case the DPP is t=4

If you post the question I may be able to help with the other part.

 

what is procedure to find dpp? how to decide from which point we have to find dpp? and if project sell after some year then selling value should consider for dpp or not?
in some example taken t and t-1/2?
any easy method to find dpp of any example for exam point of view?

 

The procedure to find the discounted payback period is exactly as in morrisja's example. This is the easiest method: set out the cashflows, discount them back to time zero, find the cumulative cashflow at each time point an the first point at which this becomes positive is your discounted payback period.

You will always find discounted payback period from time zero i.e. from the point at which you start the project and have a negative cashflow.

 

can we solve any type example by this method (as explained by morrisja)?

pls can you solve this example for me ( tell me only imp. step i will continue)


A property developer is constructing a block of offices. It is anticipated that the offices will take six months to build. The developer incurs costs of £40 million at the beginning of the project followed by £3 million at the end of each month for the following six months during the building period. It is expected that rental income from the offices will be £1 million per month, which will be received at the start of each month beginning with the seventh month. Maintenance and management costs paid by the developer are expected to be £2 million per annum payable monthly in arrear with the first payment at the end of the seventh month. The block of offices is expected to be sold 25 years after the start of the project for £60 million. (i) Calculate the discounted payback period using an effective rate of interest of 10% per annum.




regerds
mayuresh

 

So start by setting up the cashflows. It can be helpful if you produce a timeline to do this, split monthly. What are the cashflows in:

Time 0 (start of month 1)
Time 1 (end of month 1)
Time 2 (end of month 2)
Time 3 (end of month 3)
.
.
.
.

 

pls tell me for 1 months solution. i am so much confused in dpp.
pls

 

Time 0 is the initial payment of £40m (so is a cashflow of -£40m)
Time 1 is the first payment of £3m (so is a cashflow of -£3m)

Continue in this manner. The cashflows will change in month 7.

 

2 month -3
3 month -3
4 month -3
5 month -3
6 month -3
7 month +1
8 month +1
is +1 is continue to 25 year.

pls tell me
n pls if u dnt mind give me contact number. i will call u tomarrow

 

Not quite. Notice that the £3m payments are paid at the END of each month, and rent comes in at the START of each month. So in month you will have both payments happening at the same time and the net cashflow will be -£2m.

Then you also need to take into account the management costs, which are £2m a year, or £167k per month, which also start in month 7.