# Payback Period Questions And Answers Pdf

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Under payback method , an investment project is accepted or rejected on the basis of payback period. Payback period means the period of time that a project requires to recover the money invested in it. Unlike net present value and internal rate of return method , payback method does not take into account the time value of money.

## payback period questions and answers pdf

The payback period is the amount of time required for cash inflows generated by a project to offset its initial cash outflow. There are two ways to calculate the payback period, which are:. Averaging method. Divide the annualized expected cash inflows into the expected initial expenditure for the asset. This approach works best when cash flows are expected to be steady in subsequent years. Subtraction method. Subtract each individual annual cash inflow from the initial cash outflow, until the payback period has been achieved.

In the Study Guide for Paper FFM, reference E3 a requires candidates to not only be able to calculate the payback and discounted payback, but also to be able to discuss the usefulness of payback as a method of investment appraisal. Recent Paper FFM exam sittings have shown that candidates are not studying payback in sufficient depth or breadth to answer exam questions successfully. This article aims to help candidates with this. Candidates should note that payback is not only examined within the Paper FFM syllabus, but also the Paper F9 syllabus. From the definition, it can be seen that only cash flows should be included within the calculation — specifically, only relevant cash flows should be included within the calculation, so items such as depreciation should be excluded. Depreciation will be on a straight line basis over the life of the project.

Discounted payback period is a variation of payback period which uses discounted cash flows while calculating the time an investment takes to pay back its initial cash outflow. One of the major disadvantages of simple payback period is that it ignores the time value of money. To counter this limitation, discounted payback period was devised, and it accounts for the time value of money by discounting the cash inflows of the project for each period at a suitable discount rate. In discounted payback period we have to calculate the present value of each cash inflow. For this purpose the management has to set a suitable discount rate which is usually the company's cost of capital. The discounted cash inflow for each period is then calculated using the formula:.

## Payback and discounted payback

Question: Although the net present value NPV and internal rate of return IRR methods are the most commonly used approaches to evaluating investments, some managers also use the payback method. What is the payback method, and how does it help managers make decisions related to long-term investments? The payback period , typically stated in years, is the time it takes to generate enough cash receipts from an investment to cover the cash outflows for the investment. Managers who are concerned about cash flow want to know how long it will take to recover the initial investment. The payback method provides this information. Managers may also require a payback period equal to or less than some specified time period. Note that the payback method has two significant weaknesses.

The payback period is the time it will take for a business to recoup an investment. Consider a company that is deciding on whether to buy a new machine. Management will need to know how long it will take to get their money back from the cash flow generated by that asset. The calculation is simple, and payback periods are expressed in years. What Are the Criticisms of the Payback Period? NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks.

Updated on Jan 05, - PM. Capital Budgeting is one of the main functions in finance management. This uses various techniques to assist management in selecting one project over another. During the course of business, the management comes across various opportunities that lead to the expansion of existing projects or new projects. Ideally, management would not like to forgo any good opportunity but due to capital restraints, it has to choose between projects.

(i) Pay-back period (ii) Net Present Value and (iii) Internal Rate of Return. Solution: (i) Payback Period: Initial outlay. = Rs. 40, Cashflows for 5 years.

## Payback method

Original Investment. The calculation of the payback period depends on the uniformity of annual cash flows. When annual cash flows are not equal i. When annual cash flows are equal, or in other words the company is receiving an annuity, the calculation of the payback period is straightforward: divide the original investment by the annual cash flow. Let us look at the following example to better understand how the payback period is calculated.

The following are the cash flows of two projects: What is the payback period of each project? Which of the following are disadvantages of the payback period decision rule? Pro A Pro B Some advantages and disadvantages of payback method are given below: Happy sallah and thanks, i got exactly what i need. The machine will increase Major's cash flows by

Если бы вы только… - Доброй ночи, сэр.  - Кассирша опустила металлическую шторку и скрылась в служебной комнате. Беккер шумно вздохнул и поднял глаза к потолку. Успокойся, Дэвид. Спокойно.

#### How Do You Calculate Payback Period?

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Беккер почувствовал комок в горле. - Когда она уезжает. Двухцветный словно будто только что очнулся.

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Казалось, вспыхнувшая на его глазах перепалка абсолютно его не касается. Очевидно, Стратмор вдруг задумался:. У Сьюзан имелся на это ответ.

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Он смотрел в ее глаза, надеясь увидеть в них насмешливые искорки. Но их там не. - Сью… зан, - заикаясь, начал .

Хейл улыбнулся: - Ну конечно… Принцип Бергофского. - А также здравый смысл! - отрезала. - Кто знает… - Хейл театрально вздохнул.