Question

is considering investing in one of the following indiv Example 18./ Wollensky Ltd is conside projects: Time (years) Project A Projects Project 0 Initial capital expenditure Expected annual 50,000 17,000 50,000 2,000 60,000 21,000 Remember that capital expenditures expenditure on fored profitilloss) 2,000 16,000 12,000 7,000 2,000 (18,000) 10,000 6,000 8,000 2,000 10,000 6,000 1,000 (4.000) 15,000 5 Estimated resale value of equipment Required Calculate the payback period for each project and, on this basis, advise Wollensky Ltd which project to invest in. Wollensky Ltd has a total of £60,000 available to invest. Wollensky Ltd depreciates non-current assets on a straight-line basis. Suggested solution First it is necessary to convert the income statement information into cash flow information. To do this, we need to adjust for depreciation (we are not told about anything else):

could someone explain me how they got 2 years and four month at the end? dont know where they got it from. thanks

Answer 1

Project A:
				Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Cumulative cash flow				-50000	-25000	-5000	10000	20000	20000
Payback period=Years before full recovery of cost+(Unrecovered cash flow at the start of the year/Cashflow during the year)=2+(5000/15000)=2+0.33=2.33 years
Multiply 0.33 by 12 to convert it into month
0.33*12=4 months
Hence, Answer is 2 years and 4 months