Question

what is the payback

u p fad Page Layout Formula One FINCH Cap Batting Gro Del me what you want to de Review View ACROBAT Quickbooks 3) Start up expenses Total Basis Cost (1+23) 3. 4) Net Working Capital 31 Total Initial Outlay $ $ $ $ 5,000) 240 000) 20.000) (250 000) 37 Operations 38 Revenue Operating Cost 40 Depreciation EBIT 42 Taxes 2) Net Income 200.000 $ (120.000) $ 160.000) $ 20,000 $ 4200 S 15,800 $ 210.000 $ (126,000) $ (60.000) $ 24,000 $ 5.040) S 18 960 $ 220,500 $ 231.525 (132300) $ (138.915) 100.000) $ (60.000) 28,200 $ 32 610 (5922) $ 6.848 22.278 $ 25,762 45 Add back Depreciation 60 000 $ Total Operating Cash Flow 60.000 $ 78.960 S 60,000 $ 60,000 82.278 $ 85,762 75 800 S 15 Terminal: se 1) Change in net WC 512) Salvage value (after tax) Total Salvage Value Before Tax (1-T) $ $ $ 20.000 11.850 31,850 S4 Project Net Cash Flows $ 260,000) $ 75,000 $ 78,960 2.278 $ 117,612 INPV = 16,31248 IRR 12.67% Payback Would you accept the project based on NPV, IRR? Would you accept the project based on Payback rule of project cut-off O e se

Answer 1

The payback period is the period by which we are able to recover the initial investment without taking into the account time value of money.

In the above question, our initial investment is $260,000. We recover $75,800 in the first year, $78,960 in the second year and $82,278 in the third year.

By the end of the third year, we are yet to recover = $260,000 - $75,800 - $78,960 - $82,278 = $22,962

In the fourth year, we recover $117,612, therefore we recovered the initial investment before the completion of the fourth year. We recovered the remaining portion of the initial investment ($22,962) during the fourth year. To calculate that we need to divide the remaining portion of the initial investment with the cash flow of the fourth year.

=22,962/117,612 = 0.20

So that means we recovered the full initial investment by .20 of the fourth year.

Total Payback period comes out to be 3.2 years