Payback Period | Uneven Cash Inflow | Capital Budgeting |Problems & Solutions | Financial Management

Solved problems illustrating Payback Period - Uneven cash flows.

Procedure for computation of Payback Period
- Compute cumulative Cah inflow( Profit after Tax Before Depreciation)
at the end of each year
- Find out the year in which cumulative cash inflow exceeds the initial investment
-Payback period = Time at which cumulative Cash inflow = Initial investment(calculated on time proportion basis)

Accept - Reject Criterion:
1. If the actual payback period is less than the predetermined payback, the project would be accepted, if not, it would be rejected.
2. The project having the shortest payback may be assigned rank 1, followed in that order so that the project with the longest payback would be ranked last.
Advantages:
- It is simple to understand and easy to calculate.
- It saves cost, it requires lesser time and labour as compared to other methods of capital budgeting.

Disadvantages:
- This method ignores the time value of money.
- It does not measure the true profitability of the project.

Links:
Introduction:
Even Cash Inflows:

#FinancialManagement #CapitalBudgeting

[Beast_podcast]

In question no 7, how to calculate profit before depreciation?? For each year, early it was mention 1000, 2000 now it’s mention 42000 ?5:12