PAY BACK PERIOD

Saturday, August 6, 2022 6:22 PM

• PAY BACK PERIOD MEANS WHEN WILLL THE AMOUNT OF INVESTEMENT YOU HAVE DONE WILL BE PAID BACK TO YOU.

Q1 YEAR CASH FLOW

0 OUT FLOW (50,000)

1 INFLOW 22,000)

2 IN FLOW 22,000

3 IN FLOW 20,000

THE COST OF CAPITAL IS 10%

REQUIREMENT: 1) CALULATE PAY BACK PERIOD

2) CALCULATE DISCOUNTED PAY BACK PERIOD

SLOUTION: 1) PAY BACK PERIOD

YEAR CASH FLOW CUMMULATIVE CASH FLOW

0 OUT FLOW (50,000) (50,000)

1 IN FLOW 22,000 (28,000) 50,000-22,000=28,000

2 IN FLOW 22,000 (6,000 ) 28,000-22,000=6,000

3 IN FLOW 20,000

FOR MONTHS CALCULATION IS: CURRENT YEAR CUMMULATIVE CASH FLOW/NEXT YEAR CUMULATIVE CASH FLOW*100

6000/20,000*12=3.6 MONTS ROUNDED WHICH MEANS 4 MONTHS

SO THERE FOR THE PAY BACK PERIOD IS 2 YEARS AND 4 MONTHS. IF THERE WAS NO REMAINDER IN YEAR 2 (6000) THEN THE PAY BACK PERIOD WOULD BE 2 YEARS BECAUSE
THE MONEY INVESTED WILL BE PAID BACK IN FULL AMOUNT.

2) DISCOUNTED PAY BACK PERIOD

TO CLACULATE DISCOUNTED CASH FLOW THE FORMULA FOR DISCOUNT IS REQUIRED WHICH IS= (1+R)^-N * CASH INFLOW ROUND TO DECIMAL PLACE IS THE BEST

R= RATE OF INTEREST OR COST OF CAPITAL. (MUST BE WRITTEN BY DIVIDING IT BY HUNDRED IN THE FORMULA EG 10%= 10/100=0.1
CACLULATION OF DISCOUNT FACTORS

YEAR 1: (1+0.1)^-1=0.909
YEAR CASH FLOW DISCOUNT FACTOR (10% ) DISCOUNTED CASH FLOW(PRESENT VALUE) CUMMULATIVE CASH FLOW
YEAR 2: (1+0.1)^-2=0.826
YEAR 3: (1+0.1)^-3=0.751
0 OUT FLOW (50,000) (50,000) (50,000)

1 INFLOW 22,000 0.909 19,998 (30,002)

2 IN FLOW 22,000 0.826 18,172 (11,830)

3 IN FLOW 20,000 0.751 15,020

11,830/15,020*12=9.4514 ROUNDED WILL BE 10 MONTHS

SO THERE FOR THE DISCOUNTED PAY BACK PERIOD WILL BE 2 YEARS AND 10
MONTHS.

• IF THE ANNUAL CASH INFLOWS ARE CONSTANT THAN THE FORMULA FOR PAY BACK PERIOD WILL BE = CASH OUT FLOW/CASH INFLOW

EG: YEAR CASH FLOW

0 ( 40,000)

1 20,000

2 20,000

3 20,000

PAY BACK PERIOD= 40000/20000=2 YEARS

PAY BACK PERIOD Page 1