Question

Question 2: Calculate the Payback Period. Shall investment be accepted target payback period is 3 years? (25 marks) Question 3: Calculate Average Accounting Return (AAR) for the Famous Company. Shall investment be accepted if target rate of return is 19%? (15 marks)

Answer 1

		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Investment		850000
Sales	A		400000	450000	500000	550000	550000
Selling expense	B		60000	65000	65000	65000	70000
Rent expense	C		52000	50000	55000	55000	55000
Salary	D		53000	55000	55000	60000	60000
depreciation	E		150000	150000	150000	150000	150000
Net Income (A-b-c-d-e)	F		85000	130000	175000	220000	215000
Cash Flow (F+E)	G	-850000	235000	280000	325000	370000	365000
Cumulative Cash Flow		-850000	-615000	-335000	-10000	360000	725000

Payback Period : Payback Period =   A + B
C
Where,
A is the last period number with a negative cumulative cash flow;
B is the absolute value (i.e. value without negative sign) of cumulative net cash flow at the end of the period A; and
C is the total cash inflow during the period following period A

Payback period = 3 years + (10000/370000)

= 3.027 Years

Yes Company can invest in project

Average Accounting Return = Average Annual profit / Initial Investment

(85000+130000+175000+22000+215000) / 5
850000

= 165000 * 100
850000

= 19.41%

As return is more than 19% company can invest in the project