Cost of Capital 15%

Years 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Savings 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000 35,000
Depreciation 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667
Pre-tax Savings 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333 24,333
Less: Tax @ 40% 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733 9,733
Operating flows after tax 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600 14,600

Add: depreciation 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667 10,667
Equipment Cost 154,000
Installation 6,000
Net Proceeds of sale 19,000
Tax on sale 5,200

146,200 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267 25,267

NPV 1,544

IRR 15.22%

Payback
Time Cashflows Cumulative CF

0 146,200 146,200
1 25,267 120,933
2 25,267 95,666
3 25,267 70,399
4 25,267 45,132
5 25,267 19,865
6 25,267 5,402 Payback
7 25,267 30,669
8 25,267 55,936
9 25,267 81,203
10 25,267 106,470
11 25,267 131,737
12 25,267 157,004
13 25,267 182,271
14 25,267 207,538
15 25,267 232,805

Discounted Payback
Time Cashflows Discounted CFCumulative
0 146,200 146,200 146,200
1 25,267 21,971 124,229
2 25,267 19,105 105,123
3 25,267 16,613 88,510
4 25,267 14,446 74,063
5 25,267 12,562 61,501
6 25,267 10,924 50,577
7 25,267 9,499 41,079
8 25,267 8,260 32,819
9 25,267 7,182 25,636
10 25,267 6,246 19,391
11 25,267 5,431 13,960
12 25,267 4,723 9,237
13 25,267 4,107 5,131
14 25,267 3,571 1,560
15 25,267 3,105 1,546 Discounted Payback
Payback method puts long term investment projects at a disdvantage due to following factors:
- They donot incorporate the time value of money. While for short term investments, factoring TVM may not make much of a differnce, it will have huge impact for long term project.
- Payback period does not show any financial picture of the cash flows beyond the breaking point. For short term projects, cash flow returns are comparatively received in near future.
While for long-term investments, cash flow returns continue to be received. In case where higher cash flows are to be received at the later stages of the project life, and earlier stages only provide lower cash flows, The payback period calculated will be higher.
- It only tells us how much time is needed to recover the initial amount. No returns are shown

If Accelerated depreciation was used instead of straight line depreciation:

- Higher expense would be recorded in first 5 years cpomparitively.
- Lower profit before tax in first 5 years
- leading to lower tax payments (in cashflow terms)
Leading to higher NPV and IRR