Scribd
Upload
151 views4 pages

Investment Payback Period Calculation

This document provides information to calculate the payback period and bail-out method for an investment with uneven cash inflows over 6 years. It also provides information to calculate the time-adjusted rate of return for an investment with an initial cost of ₱46,000 and estimated annual after-tax cash benefits of ₱10,000 over 10 years. The payback period is calculated to be 5.75 years and the bail-out period is calculated to be 2.3 years. The time-adjusted rate of return, or accounting rate of return, is calculated to be 17%.

Uploaded by

Ally M. Eulalio
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
151 views4 pages

Investment Payback Period Calculation

This document provides information to calculate the payback period and bail-out method for an investment with uneven cash inflows over 6 years. It also provides information to calculate the time-adjusted rate of return for an investment with an initial cost of ₱46,000 and estimated annual after-tax cash benefits of ₱10,000 over 10 years. The payback period is calculated to be 5.75 years and the bail-out period is calculated to be 2.3 years. The time-adjusted rate of return, or accounting rate of return, is calculated to be 17%.

Uploaded by

Ally M. Eulalio
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Additional Problem #5

Cost of Investment ₱ 150,000

Cash Inflows:
Year Net Operating Cash Inflows Salvage Value
1 ₱ 40,000 ₱ 100,000
2 30,000 70,000
3 25,000 60,000
4 20,000 50,000
5 20,000 30,000
6 20,000 10,000

Required: Compute the


a. Payback period
b. Bail - out method

If the cash inflows are even (such as for investments in annuities), the
formulate calculate payback period is:

Payback Period = Initial Investment/ Net Cash Flow per Period

When cash inflows are uneven, we need to calculate the cumulative


net cash flow for each period and then use the following formula:

Payback Period = A + B/C


Where,
A is the last period number with a negative cumulative cash flow;
B is the absolute value (i.e. value without negative sign) of
cumulative net cash flow at the end of the period A; and
Cis the total cash inflow during the period following period A

Cumulative net cash flow is the sum of inflows to date, minus the
initial outflow.

Bail - out period is an approach which incorporated the salvage value


in payback computations.

Bail - out payback period = 1 year + (Investment cost - a/b) x 1 year

Where:
(a) Cash returns during the 1st year + Salvage value; 2nd year
(b) cash returns during the 2nd year
Additional problem #6
Herman Company acquired an asset at a cost of ₱ 46,000.
It had an estimated life of ten years. Annual after tax cash benefits
are estimated at ₱ 10,000 at the end of each year. The following
amounts appear in the interest table for the present value of an annuity
of ₱ 1 at year - end for ten years:

16% - 4.83 18% - 4.49 20% - 4.19

Required:
Compute the time - adjusted rate of return of the project.

Simple rate of return or Accounting rate of return (ARR) also known


as book value rate of return, measures profitability from the conventional
accounting standpoint by relating the required investment to the future
annual net income.
Solution:
REQUIRED a.

Year Annual Cash Flows Cumulative Cash Flow


0 -150,000 (₱ 150,000)
1 40,000 (₱ 110,000)
2 30,000 (₱ 80,000)
3 25,000 (₱ 55,000)
4 20,000 (₱ 35,000)
5 20,000 (₱ 15,000)
6 20,000 ₱ 5,000

Payback period = 5 + (15,000/20,000) = 5.75 or 5.8 years

REQUIRED b.

Bail out period = 1 + (150,000 - 110,000/30,000) x 1 year =


2.33 or 2.3 years
Solution:

AAR = Average Annual Net Income/Initial investment or Average Investment

Set up the following equality (I = PV)


46,000 = 10,000 x PV
PV = 46,000/10,000

AAR = 46,600/10,000 = 4.66 or 17%

You might also like