AMIS 525

Payback Evaluation of Operating Investments

EVALUATION OF PAYBACK METHOD

4.00%

interest rate

0
1
2
3
4
5
6
7
8
9
10
payback (P)
sum of flows (SF)
PV
NPV

A
($6,000)
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000
6.00
$4,000.00
$8,110.90
$2,110.90

Note: change to 15% and notice NPV

B
($6,000)
$5,000
$200
$200
$200
$200
$200
$1,000
$1,000
$1,000
$1,000
6.00
$4,000.00
$8,532.57
$2,532.57

C
($6,000)
$200
$200
$200
$200
$200
$5,000
$1,000
$1,000
$1,000
$1,000
6.00
$4,000.00
$7,710.70
$1,710.70

D
($6,000)
$200
$200
$200
$200
$200
$5,000
$2,000
$2,000
$2,000
$2,000

E
($4,000)
$1,000
$1,000
$1,000
$1,000
$2,000
$2,000
$2,000

6.00
$8,000.00
$10,579.45
$4,579.45

4.00
$6,000.00
$8,374.21
$4,374.21

F
($4,000)
$1,600
$1,600
$1,600
$1,600

2.50
$2,400.00
$5,807.83
$1,807.83

notice that SFB = SFC but NPVB always > NPVC

notice that SFD > SFB but NPVD not always > NPVB
PAIRWISE COMPARISONS AND DOMINANCE

0
1
2
3
4
5
payback
sum of flows
PV
NPV

W
($1,000)
$1,000
$1,000
$1,000
$1,000
$1,000
1.00
$4,000.00
$4,451.82
$3,451.82

X
($1,000)
$1,000
$500
$1,000
$1,000
$1,500
1.00
$4,000.00
$4,400.51
$3,400.51

W-X
$0
$0
$500
$0
$0
($500)

$0.00
$51.31
$51.31

Y
($500)
$200
$200
$400
$200
$300

Z
($500)
$400
$200
$200
$200
$200

4.00
4.00
$800.00
$700.00
$1,150.36 $1,082.67
$650.36
$582.67

Y-Z
$0
($200)
$0
$200
$0
$100

$100.00
$67.68
$67.68

note: NPVW > NPVX for any ir > 0

but NPVY may be > or < NPVZ depending on the ir

1/9/2014