Certified Financial Management Specialist Practice Exam

What does the discounted payback period account for?

1. Total cash inflows

2. Time value of money

3. Loan repayment schedules

4. Operational costs

The correct answer is: Time value of money

The discounted payback period specifically focuses on the time value of money, which is a key concept in financial management. This method evaluates how long it will take for an investment to "pay back" its initial outlay considering the present value of future cash flows. By discounting future cash inflows to reflect their present value, the discounted payback period gives a more accurate representation of how quickly an investment will recover its costs. This is particularly important because it recognizes that a dollar received in the future is not worth the same as a dollar received today. Thus, by applying the time value of money, the discounted payback period allows investors to assess the viability of an investment more accurately than simple payback methods. Hence, the rationale for this financial measure is rooted in its ability to incorporate time and inflation impacts, embracing the essential principle that money today can earn interest or yield additional benefits over time.