# What is the payback Period?

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#1
what is the payback period in years and months?

Capital expenditure: £150,000

y1: +£35,000
y2: +£30,000
y3: +£30,000
y4: +£10,000
y5: -£25,000

cost of capital 10%
0
5 years ago
#2
Not sure if theres enough information here to answer the question. As I understand it Payback Period is the amount of time it will take for an investment to be returned (how long it would take for the investment to generate enough profit to have equalled the amount that was originally paid for it). I'm guessing the figures you have quoted are the net cash flow for each year but you have not quoted the figure for the original investment. To work it out lets take a guess that the original investment was £100,000. In years 1-3 you can see that there has been a return of £95,000, leaving £5,000 to be repaid. If you take that £5,000 and divide it by the net cash flow for the next year (year 4, £10,000) then the result should be 0.5. Convert this into months by multiplying by 12, giving an answer of 6 months. Therefore the total payback period would be 3 years and 6 months. However you have also given a cost of capital figure of 10%, is this to be taken from the figure from each year? For a full answer I would need more info. Not sure if this is any help but if you need more then please just message the details.
0
5 years ago
#3
Sorry I see the capital expenditure of £150,000. theres still no answer as the total net cash flow for years 1-5 do not meet this figure so therefore the payback period is more than 5 years.
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#4
(Original post by mature35)
Sorry I see the capital expenditure of £150,000. theres still no answer as the total net cash flow for years 1-5 do not meet this figure so therefore the payback period is more than 5 years.

The question says this investment is to have a "useful life of five years and the initial capital expenditure isn't expected to have any residual value for the company" would this mean I say the payback period is 5+ years?
0
5 years ago
#5
Was this an exam question? I would answer that the investment should not be made as whatever the investment is for, after 5 years (the total of its useful life) the cost of it would not be meet. Based on the figures given the cost of the investment would be £150,000 + 10% = £165,000. The total of the 5 years net cash flow = £80,000. Therefore the investment would still owe the business £85,000 at the end of its life. As there can be no further money earned from this investment then there can be no payback period as it is never paid back. Hope this helps.
0
5 years ago
#6
Payback = time to recoup initial investment from cash flows, assuming year 1-5 = cash flows the total = \$130,000 - payback n/a
0
5 years ago
#7
The cost of capital relates to the discount factor which does not apply to payback calculations and do can be ignored.
0
5 years ago
#8
Wtf are you doing, it's the holidays man.
0
5 years ago
#9
There is a variation of the conventional payback calculation called 'discounted payback', cash flows are discounted at the relevant cost of capital - this helps overcome one of the limitations of conventional payback which ignores the time value of money
Re working through holidays - it's not hols for everyone

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