The discounted payback period (DPP) is a capital budgeting technique that determines how long it takes for a project’s discounted cash flows to recover its initial investment. Unlike the regular payback period, the DPP accounts for the time value of money by discounting future cash flows.
(A) It calculates the overall value of a project.
Incorrect. The discounted payback period only measures how long it takes to recover the initial investment—it does not determine the overall value of a project. Net Present Value (NPV) and Internal Rate of Return (IRR) are used to evaluate a project's overall value.
(B) It ignores the time value of money.
Incorrect. Unlike the regular payback period, the discounted payback period accounts for the time value of money by discounting future cash flows using a required rate of return.
(C) It calculates the time a project takes to break even. ✅
Correct. The discounted payback period determines how long it takes for the present value of cash inflows to recover the initial investment. It helps assess the risk and liquidity of a project.
IIA GTAG "Auditing Capital Budgeting and Investment Decisions" states that discounted payback is useful for assessing the risk of projects by considering cash flow recovery time.
(D) It begins at time zero for the project.
Incorrect. The calculation starts at time zero (when the investment is made), but the method itself focuses on future discounted cash flows to determine the break-even point.
IIA GTAG – "Auditing Capital Budgeting and Investment Decisions"
COSO ERM Framework – Capital Investment Risk Management
GAAP/IFRS – Discounted Cash Flow Methods
Analysis of Answer Choices:IIA References:Thus, the correct answer is C, as the discounted payback period measures the time needed to break even after adjusting for the time value of money.
