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Unformatted text preview: nal cost • Decision Rule – Accept if the payback period
is less than some preset limit
914 Computing Payback For The
Project
• • • Assume we will accept the project if it pays back within two years.
Costs in year 0: 165,000. Future cash flows are:
• Year 1: CF = 63,120
• Year 2: CF = 70,800
• Year 3: CF = 91,080
Answer:
• Cumulative cash flows at the end of year 1 = 63,120
• Cumulative cash flows at the end of year 2 = 63,120 + 70,800 =
133,920. Not fully paid back yet since 133,920 is less than
165,000.
• Cumulative cash flows at the end of year 3 = 133,920 + 91,080 =
225,000. It is therefore fully paid back by the end of year 3.
If the preset limit is 4 years or less, do we accept or reject the
project?
• We would accept it, because payback occurs in year 3.
915 Payback period example 1 • Compute the payback period given the
cash flows above. Would the project be
approved if the acceptable payback period
is 3 years or less?
• Answer: the payback period is exactly two
years so the project should be approved.
916 Payback period example 2
Time
0
1
2
3
4 • Compute the payback
Cash flow
period given the cash
85,000
100
flows. Would the project
500
be approved if the
300
acceptable payback
2,000,000
period is 3 years or less?
• Answer: the payback
period is four years so
the project should NOT
be approved.
917 Adding more precision
•
•
•
• Year 0:
Year 1:
Year 2:
Year 3: • We already did this example above and showed that the cumulative
cash flows at the end of year 2 are 133,920 and year 3 are 225,000.
We can calculate the payback period with more precision by figuring
out what percentage of year three is needed to completely pay off
the 165,000.
By the end of year 2, we’ve paid off 133,920
The remainder to payback is 165,000 – 133,920 = 31,080.
This represents 31,080 / 91,080 = 0.34 = 34%
So the precise payback period is 2.34. •
•
•
•
•
• CF= 165,000
CF = 63,120
CF = 70,800
CF = 91,080 Casio fx9750: Enter the cash flows into a list. Set I=0 and choose
F3 for PBP.
918 Compar...
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This document was uploaded on 02/06/2014.
 Fall '14

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