Payback Period - TestPanda ~ Top Stories Info

Business. Finance Q&A Library Which of the following statements are true regarding the payback period of an investment? It does not account for the time value of money No objective criteria exists for what is an acceptable payback period Cash flows occurring after the payback period have no...Payback Period is the time where a project's net cash inflows are equal to the project's initial The main advantages of payback period are as follows: A longer payback period indicates capital is tied up. It ignores the cash flow produced after the end of the payback period and therefore the total...The payback period is the time it takes to earn back the cash invested in a project. It allows a business to determine how long it will take before a Payback Period Example. If a business invests in a project whose cost is 150,000 and expects to receive cash inflows of 32,000 per year, then the...Payback period is the time in which the initial outlay of an investment is expected to be recovered through the cash inflows generated by the investment. The formula to calculate the payback period of an investment depends on whether the periodic cash inflows from the project are even or uneven.What is the payback period of the following project? Initial Investment: $50,000 Projected life: 8 years Net cash flows each year: $10,000. - the payback period is to dependent on cash inflows which are hard to predict. - The payback period only considers revenue, does not consider profits.

What Is Payback Period? (With Advantages & Disadvantages)

A. The longer the payback, the longer the estimated life of the asset.B. The longer the payback, the sooner the cash spent on the investment is Which of the following provisions of the Internal Revenue Code can be used to reduce the amount of the income tax expense arising from capital...Which of the following is not true with respect to the Accounting Rate of Return (ARR)? Question 9. The fundamental principle of the application of Discounted Cash Flow (DCF) techniques to investment appraisal is Which of the following is not a criticism of payback?One of the disadvantages of the payback period is that it doesn't analyze the project in its lifetime; whatever happens after investment costs are recovered won't affect the payback period. For example, if two investment alternatives have 10-year lifetimes...Payback period has the virtue of being easy to compute and easy to understand. But that very simplicity carries weaknesses with it. Payback period says nothing about how the investment performs after the break-even period. Consider the two examples of $1 million projects shown in the chart at...

Payback Period Method | Double Entry Bookkeeping

Payback period basically pays attention to the speed at which the initial investment made in a project will be recovered by subsequent cash flows. The project which helps recoup the investment the fastest is considered to be the best project and that is the project that the firm must dedicate its resources to.Which of the following will not be a relevant factor when using the payback method of capital investment appraisal? Popps Ltd is considering the purchase of an asset for £120,000. This asset will generate the following cash flows: £ Year 1 15,000 Year 2 25,000 Year 3 40,000 Year 4 40,000...Definition of payback period in the Financial Dictionary - by Free online English dictionary and encyclopedia. payback period. An estimate of the time that will be necessary for an investor to recoup the initial investment.It is used to compare investments that might have different initial capital...Payback Period Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of ompute separate equivalent units of production one for materials and one for labor and factory overhead for each of the conditions listed using a the...The payback period is an evaluation method used to determine the time required for the cash flows from a project to pay back the initial investment. For example, if a $100,000 investment is needed and there is an expectation of the project generating positive cash flows of $25,000 per year thereafter...

Home Accounting Capital Budgeting Payback Period

Payback period is the time in which the preliminary outlay of an funding is expected to be recovered through the cash inflows generated through the funding. It is one of the most straightforward funding appraisal techniques.

Since cash go with the flow estimates are reasonably correct for classes in the near long term and fairly misguided for sessions in far-off long run because of economic and operational uncertainties, payback period is a hallmark of chance inherent in a venture because it takes initial inflows into consideration and ignores the cash flows after the level at which the initial investment is recovered.

Projects having better cash inflows in the previous sessions are in most cases ranked higher when appraised with payback period, compared to an identical projects having higher cash inflows in the later classes.

Formula

The method to calculate the payback period of an funding depends upon whether the periodic cash inflows from the mission are even or asymmetric.

If the cash inflows are even (similar to for investments in annuities), the method to calculate payback period is:

Payback Period =Initial InvestmentNet Cash Flow in keeping with Period

When cash inflows are uneven, we want to calculate the cumulative internet cash drift for every period after which use the following formula:

Payback Period =A +BC

Where,A is the last period number with a damaging cumulative cash waft;B is the absolute price (i.e. value with out adverse signal) of cumulative net cash glide at the finish of the period A; andC is the overall cash inflow during the period following period A

Cumulative internet cash float is the sum of inflows to date, minus the initial outflow.

Both of the above eventualities are defined thru examples given below.

Examples

Example 1: Even Cash Flows

Company C is planning to adopt a project requiring preliminary funding of $a hundred and five million. The venture is anticipated to generate million consistent with year in web cash flows for 7 years. Calculate the payback period of the challenge.

Solution

Payback Period = Initial Investment ÷ Annual Cash Flow = 5M ÷ M = 4.2 years

Example 2: Uneven Cash Flows

Company C is making plans to adopt every other challenge requiring initial investment of million and is expected to generate million web cash glide in Year 1, million in Year 2, million in yr 3, million in Year Four and million in Year 5. Calculate the payback value of the challenge.

Solution Year(cash flows in millions)AnnualCash FlowCumulativeCash Flow0(50)(50)110(40)213(27)316(11)419852230

Payback Period = 3 + 11/19 = 3 + 0.58 ≈ 3.6 years

Decision Rule

The longer the payback period of a venture, the upper the possibility. Between mutually exclusive projects having equivalent go back, the resolution must be to put money into the venture having the shortest payback period.

When deciding whether to invest in a project or when comparing tasks having other returns, a decision in accordance with payback period is fairly complex. The choice whether to just accept or reject a venture in response to its payback period is dependent upon the chance urge for food of the management.

Management will set a suitable payback period for person investments according to whether or not the control is chance averse or possibility taking. This goal could also be other for various tasks because higher risk corresponds with upper go back thus longer payback period being acceptable for winning initiatives. For decrease go back tasks, management will only settle for the mission if the risk is low which way payback period must be short.

Advantages and Disadvantages

Advantages of payback period are:

Payback period is very simple to calculate. It is usually a measure of possibility inherent in a challenge. Since cash flows that occur later in a mission's lifestyles are considered more unsure, payback period supplies a sign of how certain the challenge cash inflows are. For firms dealing with liquidity issues, it provides a excellent ranking of initiatives that will go back cash early.

Disadvantages of payback period are:

Payback period does no longer take note the time price of money which is a serious drawback because it may end up in fallacious selections. A variation of payback means that attempts to deal with this drawback is known as discounted payback period method. It does no longer be mindful, the cash flows that occur after the payback period. This implies that a mission having excellent cash inflows but past its payback period could also be unnoticed.

through Irfanullah Jan, ACCA and final changed on May 24, 2019

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