University of Bahrain

College of Engineering
Department of Mechanical Engineering

CHAPTER 1 3 MENG 300

S2 , 2022 / 2023

Breakeven and
Payback Analysis
Dr. Saraa Al -asadi
s a l a s a d i@u o b .e d u .b h

b y Q a s Al a s a d i
Purpose Learning Sections
Outcomes

CONTENT
Chapter Tutorial
Summary Session
Purpos e
14.29% comple te Page 02 of 15
Purpose

Determine the
breakeven for one
or two alternatives
and calculate the
payback period with
and without a
return required.
Le arning
Outcome s
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Page 02 of 15
 Learning Outcomes
TOPIC SECTION OUTCOME

Breakeven Determine the breakeven point for one

point
13.1 parameter.

Calculate the breakeven point of a

Two 13.2 parameter and use it to select between
alternatives two alternatives

Determine the payback period of

Payback period 13.3 a project at i = 0 % and i > 0 %.
Illustrate the cautions when using
payback analysis.
 13.1
Bre ake ve n
Analys is for a
Single Proje ct
42.86% comple te
 13.1 Breakeven Analysis for a Single Project
A breakeven study is performed for two alternatives to
determine when either alternative is equally acceptable.

Breakeven analysis
finds the value of a
1 Breakeven point QBE is
parameter that makes
two elements equal . 2 determined from mathematical
relations, for example,

Product revenue .
Product costs .
Breakeven analysis is
Materials supply and demand .
fundamental to evaluations such
Other parameters that involve
as make-buy decisions. when a
decision is needed about the 3 the parameter Q .
source for manufactured
components, services, etc.
 13.1 Breakeven Analysis for
a Single Project
Fixed costs (FC)
don't vary with level of production

Buildings – insurance - fixed overhead

- equipment capital recovery
- information systems

Total Costs (TC)

Variable Costs ( VC)

vary with level of production

Direct labor (wages) - direct labor

Materials - indirect costs - contractors,
marketing – advertisement - warranty
 13.1 Breakeven Analysis for a Single Project
At breakeven point Where
indicating a profit of zero
R : Revenue $
0 = R – TC Total Sales 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
R = – TC = – (FC + VC)
FC : Fixed Cost
rQ = FC + vQ $
the breakeven quantity Q = Q BE 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚

𝑭𝑭𝑭𝑭 VC : Variable Cost

𝑸𝑸𝑩𝑩𝑬𝑬 = $
𝒓𝒓 − 𝒗𝒗
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
The profit at any quantity level
Q is Q : Quantity 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
Profit = revenue − total cost 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚

P = R − (FC + VC) r : revenue

= rQ − FC − vQ per unit $
= (r – v)Q − FC 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
v : variable
If Q > QBE, there is a profit; if Q < QBE, there is a loss. cost per unit
 13.1 Breakeven Analysis for a Single Project
EXAMPLE 13.1
Indira Industries is a major producer of diverter dampers used in the gas turbine power
industry to divert gas exhausts from the turbine to a side stack, thus reducing the noise to
acceptable levels for human environments. Normal production level is 60 diverter systems
per month, but due to significantly improved economic conditions in Asia, production is at
72 per month. The following information is available.

Fixed costs FC = $2.4 million per month

Variable cost per unit v = $35,000
Revenue per unit r = $75,000

(a) How does the increased production level of 72 units per month compare with the
current breakeven point?
(b)What is the current profit level per month for the facility?
(c) What is the difference between the revenue and variable cost per damper that is
necessary to break even at a significantly reduced monthly production level of 45 units,
if fixed costs remain constant?
 13.1 Breakeven Analysis for a Single Project
EXAMPLE 13.1 Unit = damper
𝑭𝑭𝑭𝑭 𝟐𝟐. 𝟒𝟒 × 𝟏𝟏𝟏𝟏^𝟔𝟔
a) 𝑸𝑸𝑩𝑩𝑬𝑬 = =
𝒓𝒓 − 𝒗𝒗 𝟕𝟕𝟕𝟕, 𝟎𝟎𝟎𝟎𝟎𝟎 𝟑𝟑𝟑𝟑, 𝟎𝟎𝟎𝟎𝟎𝟎
𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
= 60 𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎
(
𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎
)

b) Profit = 𝒓𝒓 − 𝒗𝒗 𝑸𝑸 − 𝑭𝑭𝑭𝑭

= 𝟕𝟕𝟕𝟕, 𝟎𝟎𝟎𝟎𝟎𝟎 − 𝟑𝟑𝟑𝟑, 𝟎𝟎𝟎𝟎𝟎𝟎 𝟕𝟕𝟕𝟕 − 𝟐𝟐. 𝟒𝟒 × 𝟏𝟏𝟎𝟎𝟔𝟔

$
= 𝟒𝟒𝟒𝟒𝟒𝟒 𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎

𝑭𝑭𝑭𝑭
c) 𝑸𝑸𝑩𝑩𝑬𝑬 =
𝒓𝒓 − 𝒗𝒗
𝟐𝟐.𝟒𝟒×𝟏𝟏𝟏𝟏^𝟔𝟔 $ $
𝟒𝟒𝟒𝟒 = ---- > r - v = 53.33 (
𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
)
𝒓𝒓−𝒗𝒗
 13.3 Payback Analysis Exercise 1
The maintenance department is considering purchasing anew lath machine. The machine
cost BD 10,000 and can be used for 5 years, with no salvage value. The machine; revenue
is BD8/unit and variable cost is BD3/unit. Using15% MARR:

a) Determine the breakeven point per year.

b) If the company can sell 1500 units/year , Determine the expected yearly profit or loss .

Givins 𝑭𝑭𝑭𝑭 𝟐𝟐𝟐𝟐𝟐𝟐𝟐𝟐. 𝟏𝟏𝟏𝟏

a) 𝑸𝑸𝑩𝑩𝑬𝑬 = =
𝒓𝒓 − 𝒗𝒗 𝟖𝟖 − 𝟑𝟑
P = 10,000 $
n= 5 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
= 597 units/year ( )
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
r = 8 BD/unit A= FC = −10,000 (A ∕
P,15%,5) b) Profit = 𝒓𝒓 − 𝒗𝒗 𝑸𝑸 − 𝑭𝑭𝑭𝑭
v = 3 BD/unit = -2983.16 BD/year = 𝟖𝟖 − 𝟑𝟑 𝟏𝟏, 𝟓𝟓𝟓𝟓𝟓𝟓 − 𝟐𝟐𝟐𝟐𝟐𝟐𝟐𝟐. 𝟏𝟏𝟏𝟏
Q = 1500 units/year
$
= + 𝟒𝟒𝟒𝟒𝟒𝟒 BD/year (
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
)

Q > QBE, there is a profit

13.3 Payback Analysis Exercise 1

Q > QBE,
there is a profit
 13.3 Payback Analysis Exercise 2
Handheld fiber optic meters with white light polarization are useful for measuring
temperature, pressure, and strain in electrically noisy environments. The fixed costs
associated with manufacturing are $800,000 per year. If variable costs are $290 per unit
and the company sells 4000 units per year, at what selling price per unit will the company
break even?

Givins
𝑭𝑭𝑭𝑭
𝑸𝑸𝑩𝑩𝑬𝑬 =
𝒓𝒓 − 𝒗𝒗
FC = 800,000 $/ year
𝟖𝟖𝟖𝟖𝟖𝟖,𝟎𝟎𝟎𝟎𝟎𝟎
v = 290 $/unit 4,800 =
𝐫𝐫 − 𝟐𝟐𝟐𝟐𝟐𝟐
r = ? $/unit
r = 490 $/unit
Q BE = 4,800 units/year
 13.3 Payback Analysis Exercise 3
The costs and revenue projections for a new product are estimated. What is the estimated
profit at a production rate of 20% above breakeven?

Fixed cost = $500,000 per year

Production cost per unit = $200
Revenue per unit = $250
Givins

FC = 500,000 $/ year 𝑭𝑭𝑭𝑭 𝟓𝟓𝟎𝟎𝟎𝟎,𝟎𝟎𝟎𝟎𝟎𝟎

𝑸𝑸𝑩𝑩𝑬𝑬 = =
𝒓𝒓−𝒗𝒗 𝟐𝟐𝟐𝟐𝟐𝟐 − 𝟐𝟐𝟐𝟐𝟐𝟐
v = 200 $/unit
r = 250 $/unit
= 10,000 $/unit
Q = QBE( 0.2 +1)
= 10,000 (1.2)
=12,000 units/year Profit = 𝒓𝒓 − 𝒗𝒗 𝑸𝑸 − 𝑭𝑭𝑭𝑭
= ‫ڪڧ‬ ‫ ﭱ‬− 𝟐𝟐𝟐𝟐𝟐𝟐 𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎 − 𝟓𝟓𝟓𝟓𝟓𝟓, 𝟎𝟎𝟎𝟎𝟎𝟎
= +𝟏𝟏𝟏𝟏𝟏𝟏, 𝟎𝟎𝟎𝟎𝟎𝟎 $/year
 13.2
Bre ake ve n Analys is
Be twe e n Two
Alte rnative s
57.14% comple te
 13.2 Breakeven Analysis Between Two
Alternatives
Now we consider breakeven analysis between two mutually
exclusive alternatives

Breakeven analysis determines the value of a common

variable or parameter between two alternatives.

Equating the two PW or AW relations determines

the breakeven point.

Selection of the alternative is different

depending upon two facts:
Slope of the variable cost curve &
The parameter value relative to the breakeven point
 13.2 Breakeven Analysis Between Two
Alternatives
The following steps determine the breakeven point of the
common variable and the slope of a linear total cost
relation:

1 Define the common variable and its dimensional units.

2 Develop the PW or AW relation for each alternative as

a function of the common variable.

3 Equate the two relations and solve for the breakeven value
of the variable.
 13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.2
Devon Products produces a superior quality, high-gloss, nonskid surface concrete stone
primarily used as flooring in kitchens and baths. The equipment necessary to complete the
nonskid surface operations can be a fully automated or semiautomated machine. The fully
automated machine has an initial cost of $23,000, an estimated salvage value of $4000,
and a predicted life of 10 years. One person will operate the machine at a total cost of $40
per hour. The expected output is 8 tons per hour. Annual maintenance and operating cost
is expected to be $3500.The semiautomatic machine has a first cost of $8000, no
expected salvage value, a 5-year life, and an output of 10 tons per hour; however, an
operator with additional skills is required at the rate of $60 per hour. The machine will
have an annual maintenance and operation cost of $1500. All projects are expected to
generate a return of 10% per year. How many tons of finished stone per year must be
produced to justify the higher purchase cost of the fully automatic machine?
 13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.2 Unit = ton
Aw fully = −23,000 (A ∕
P,10%,10)
Givens Fully Auto Semi Auto
+ 4000 (A ∕
F,10%,10)
− 3500
P =−23,000 P = −8000 − 5x
S = 4000 S=0 = –6992 − 5x
FC A =− 3500 A = − 1500
annual n = 10 n=5 Aw semi = −8000 (A ∕
P,10%,5)
$ $
= –6992 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 = −3610 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 − 1500
v v
− 6x
Q Q
VC
= −3610 − 6x
annual
TCfully = TCsemi
$ 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 $ 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )( ) ( )( ) Aw fully = Aw semi
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
−6992 − 5x = −3610 – 6x
$ $
= -5X 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 = -6X 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
X = Q BE = 3382
𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
 13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.2 Unit = ton
$
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 If Qest > QBE = 3382
Choose Fully
since its VC slope of 5 is
smaller than the
semiautomatic VC
slope of 6
6992

If Qest < QBE = 3382

3610 Choose Semi
since its VC slope of 6 is
smaller than the
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 fullyautomatic VC slope
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 of 5
X = QBE = 3382
 13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.3
Guardian is a national manufacturing company of home health care appliances. It is faced
with a make-or-buy decision. A newly engineered lift can be installed in a car trunk to raise
and lower a wheelchair. The steel arm of the lift can be purchased internationally for $3.50
per unit or made in-house. If manufactured on site, two machines will be required. Machine
A is estimated to cost $18,000, have a life of 6 years, and have a $2000 salvage value;
machine B will cost $12,000, have a life of 4 years, and have a $−500 salvage value
(carry-away cost). Machine A will require an overhaul after 3 years costing $3000. The
annual operating cost for machine A is expected to be $6000 per year and for machine B
is $5000 per year. A total of four operators will be required for the two machines at a rate
of $12.50 per hour per operator. In a normal 8-hour period, the operators and two
machines can produce parts sufficient to manufacture 1000 units. Use a MARR of 15% per
year to determine the following:

(a) Number of units to manufacture each year to justify the in-house (make) option.
(b)The maximum capital expense justifiable to purchase machine A, assuming all other
estimates for machines A and B are as stated. The company expects to produce 10,000
units per year.
 13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.3 Unit = unit
a)
Givens Make (machine A&B) Buy A wA = −18,000 (A ∕
P,15%,6)
+ 2000 (A ∕F,15%,6)
−6000
$ − 3000 (P∕ F,15%,3)(A ∕
P,15%,6)
FC = −20,352 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
annual
A wB = −12,000 (A ∕
P,15%,4 )
− 500 (A ∕
F,15%,4 )
v Q − 5000
$
VC v = -3.5 ( )
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
annual Aw make A+B = −20,352
$ 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )( )
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 TCmake = TCbuy
$
Aw make = Aw buy
= -0.4 X
$
= -3.5 X 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 −20,352 − 0.4 x = – 3.5x
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )
X = Q BE = 6565 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
 13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.3 Unit = unit
$
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
If Q > QBE = 3382
Choose Make
since its VC slope of 0.4
is smaller than the Buy
VC slope of 3.5

20,352
If Q < QBE = 3382
Choose Buy
since its VC slope of 3.5
is smaller than the
0 Make VC slope of 0.4
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
X = QBE = 6565
 13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.3 Unit = unit

b) TCmake = TCbuy
Aw make = Aw buy
-FC – VC = -FC – VC

Aw make A+B − 0.4 x = – 3.5x

−P A (A ∕
P,15%,6)+ 2000 (A ∕F,15%,6)
−6000 − 3000 (P∕ F,15%,3)(A ∕P,15%,6) = – 3.5(10,000 )
−12,000 (A ∕
P,15%,4 )− 500 (A ∕
F,15%,4 )
− 5000 − 0.4 (10,000 )

−P A (A ∕
P,15%,6) = $ 15,404 per year

By CMPD : n= 6 , i=15 , A= 15,404 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖

Solve for P=? --- > P A = $58,295 (
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
)
 13.3
Payback
Analys is
57.14% comple te
 13.3 Payback Analysis
Payback analysis should not be considered the final decision maker; it
is used as a screening tool or to provide supplemental information for
a PW, AW, or other analysis.

The payback period n p is an estimated time for the revenues, savings,

and any other monetary benefits to completely recover :
The initial investment P .
A stated rate of return i.
There are two types of payback analysis as determined
by the required return :

No return Also called simple payback, this is the recovery of only the
i = 0% initial investment with no interest.

Discounted The time value of money is considered in that some return,

payback for example, 10% per year, must be realized in addition to
i > 0% recovering the initial investment.
 13.3 Payback Analysis
Formula to determine payback period (np) varies with type of analysis.

In Alternatives Comparison ,choose the alternative with shorter period np .

The salvage has no mean in the problems , so ignore it .
 13.3 Payback Analysis
EXAMPLE 13.4 By trial and error
The board of directors of Halliburton International has just approved an $18 million
worldwide engineering construction design contract. The services are expected to generate
new annual net cash flows of $3 million. The contract has a potentially lucrative repayment
clause to Halliburton of $3 million at any time that the contract is canceled by either party
during the 10 years of the contract period.

(a) If i = 15%, compute the payback period.

(b)Determine the no-return payback period and compare it with the answer for i = 15%.
This is an initial check to determine if the board made a good economic decision. Show
both hand and spreadsheet solutions.

a) b)
 13.3 Payback Analysis
EXAMPLE 13.5
Two equivalent pieces of quality inspection equipment are being considered for purchase
by Square D Electric. Machine 2 is expected to be versatile and technologically advanced
enough to provide net income longer than machine 1.

(a) Determine the no-return payback period.

(b)If i = 15%, compute the payback period (Discounted).
(c) PW analysis at 15% to select a system.
 13.3 Payback Analysis
EXAMPLE 13.5
b) Discounted i = 15%

a) No return 0% it could be solved by CMPD & Cash button -- > PBP Machine 1 : uniform

Machine 1 : uniform 0 = -12,000 + 3,000 (P/A, 15%,np )

𝑷𝑷 𝟏𝟏𝟏𝟏,𝟎𝟎𝟎𝟎𝟎𝟎 Cash button -- > PBP or CMPD -- > n
np = = = 4 years selected
𝑵𝑵𝑵𝑵𝑵𝑵 𝟑𝟑,𝟎𝟎𝟎𝟎𝟎𝟎 np = 6.57 years selected
Machine 2 : varying
-P + n NCF 1( NCF 1)= remaining Machine 2 : varying
0 = -8,000
𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓
= result (P/A, 15%,5) 1,000 +
𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵
(P/A, 15%,np -5)(P/F, 15%,5) 3,000 +
-8,000 + 5(1,000 ) = 3,000 Cash button -- >PBP

n p = nNCF 1+Result np = 9.5 years

𝟑𝟑,𝟎𝟎𝟎𝟎𝟎𝟎
=1 = 5+1
𝟑𝟑,𝟎𝟎𝟎𝟎𝟎𝟎
= 6 years
 13.3 Payback Analysis
EXAMPLE 13.5
b) Discounted i = 15%

Machine 1 Machine 2

c) Find PW over LCM of 14 years :

P w 1 = $663
P w 2 = $2470 selected
. Comment: PW method considers cash flows after payback period
Selection changes from system 1 to 2 Use payback as supplemental to PW or other analyses, because np neglects cash
flows after payback, and if i = 0%, it neglects time value of money
 13.3 Payback Analysis EXAMPLE 13.6
The president of a local company expects a product to have a profitable life of between 1
and 5 years. Help her determine the breakeven number of units that must be sold
annually(without any return) to realize payback for each of the time periods 1 year, 2 years,
and so on up to 5 years. The cost and revenue estimates are as follows:

Fixed costs: Initial investment of $80,000 with $1000 annual operating cost.
Variable cost: $8 per unit.
Revenue: Twice the variable cost for the first 5 years and 50% of the variable cost
thereafter.

Define X BE as the breakeven quantity 𝑭𝑭𝑭𝑭

and n p as the payback period.
𝑸𝑸𝑩𝑩𝑬𝑬 =
𝒓𝒓 − 𝒗𝒗
Insert np values and solve for XBE, the
breakeven value.
13.3 Payback Analysis EXAMPLE 13.6
 13.3 Payback Analysis Exercise 1

Mac Enterprises purchased an addition laser cutting machine to its current equipment
at a cost of $70,000.Extra annual expenses are expected to be $1850, and extra
income are expected to be $14,000 per year. How long will it take for the company
to recover its investment at

a) i= 0 % .
b) interest rate of 10% per year.

Uniform a) No return 0%
𝑷𝑷 𝟕𝟕𝟕𝟕,𝟎𝟎𝟎𝟎𝟎𝟎
np = = = 5.76 years
𝑵𝑵𝑵𝑵𝑵𝑵 𝟏𝟏𝟏𝟏,𝟎𝟎𝟎𝟎𝟎𝟎−𝟏𝟏,𝟖𝟖𝟖𝟖𝟖𝟖
Cash button -- > PBP or CMPD -- > n

b) Discounted i = 15%
0 = -70,000 + (14,000 – 1850 )(P/A, 10%,np )

Cash button -- > PBP or CMPD -- > n

np = 9 years
 13.3 Payback Analysis Exercise 2
An investment of $10,000 in new equipment will generate income of $4000 per year
for 10 years, starting 3 year from now. The machine can be sold for an estimated
$200 at year 13. If the company’s MARR is 15% per year,
find :

a) No return payback period .

b) Discounted payback period .
a) No return 0% Can by Cash button -- > PBP
varying
-10,000 + 2(0 ) = -10,000 n p = nNCF 1+Result
= 2+2.5
𝟏𝟏𝟏𝟏,𝟎𝟎𝟎𝟎𝟎𝟎
= 2.5 = 4.5 years
𝟒𝟒,𝟎𝟎𝟎𝟎𝟎𝟎

b) Discounted i = 15%
0 = -10,000 + 4,000 (P/A, 15%,np )(P/F, 15%,2)

Cash button -- > PBP or CMPD -- > n

np = 6.9 years
 13.3 Payback Analysis Exercise 3
The following table represents the estimated annual cash flows in (BD) of two
mutually exclusive investment opportunities.

a. Calculate the payback period for each investment opportunity.

b. In you own words, translate your findings in part a.
c. Calculate the discounted payback period for each investment opportunity for i =
10% per year .
 13.3 Payback Analysis
Exercise 3
a) No return 0% it could be solved by Cash &CMPD button - -> PBP b)
A : uniform Investment A would
𝑷𝑷 𝟏𝟏,𝟓𝟓𝟎𝟎𝟎𝟎 recover its initial cost in 5
np = = = 5 years years.
𝑵𝑵𝑵𝑵𝑵𝑵 𝟑𝟑𝟑𝟑𝟎𝟎

B: varying Investment B would

-P + n NCF 1( NCF 1)= remaining recover its initial cost in 3.2
years.
𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓𝒓
= result
𝑵𝑵𝑵𝑵𝑵𝑵𝑵𝑵

-4,000 + 3(1,000 ) = 1,000

𝟏𝟏,𝟎𝟎𝟎𝟎𝟎𝟎 n p = nNCF 1+Result

= 0.2 = 3+0.2
𝟓𝟓,𝟎𝟎𝟎𝟎𝟎𝟎
= 3.2 years selected
 13.3 Payback Analysis
Exercise 3

c) Discounted i = 15%

Machine 1 : uniform Machine 2 : varying

0 = -𝟏𝟏,𝟓𝟓𝟎𝟎𝟎𝟎 + 300 (P/A, 10 %,np ) 0 = -4 ,000

+ 1,000 (P/A, 10 %,3)
Cash button -- > PBP or CMPD -- > n
+ 5,000 (P/A, 10 %,np )(P/F, 10 %,3)
np = 7.27 years
Cash button -- >PBP
np = 3.44 years

selected
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