Further to my earlier article on Accounting Rate of Return, let’s look at another simple investment appraisal method called Payback Period.This method seeks to determine how long it takes for the investment project to pay back its initial capital cost.
Illustration:
Let’s say we have two project A & B, having the following initial capital cost, cash inflows and timing
Project A:
|
Year |
Investment |
Cash Savings/Inflows |
Cumulative Inflows |
|
0 |
100,000 |
|
|
|
1 |
|
30,000 |
30,000 |
|
2 |
|
40,000 |
70,000 |
|
3 |
|
30,000 |
100,000 |
|
4 |
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