Final answer:
The discounted payback period calculates the time needed to recover an investment with consideration for the time value of money, which is not the case for the simple payback time. It involves discounting projected cash inflows and comparing them to the initial investment cost.
Step-by-step explanation:
The discounted payback period is best defined as the length of time until the initial cost of an investment is recovered, but unlike the simple payback period, it takes into account the time value of money.
This means that it considers the present discounted value of future cash flows from the investment. It is a financial metric used to evaluate the profitability and risk of an investment.
The discounted payback period calculation discounts the projected annual cash inflows from the investment by a chosen discount rate (often the cost of capital), and then determines how many years it takes for those discounted cash inflows to repay the initial investment cost.
To calculate a simple payback time assuming energy costs $1.00 per million joules and insulation costs $4.00 per square meter, you would need to determine the amount of energy saved annually by the insulation, translate that into monetary savings, and then divide the cost of insulation by the annual savings.
This simple payback time does not consider the time value of money. For instance, if the insulation saves enough energy each year to result in $400 of savings, and the cost of the insulation is $4,000, then the simple payback time would be 10 years.