6.1
6.2
CUMULATIVE NET CASH FLOWS IN ORDER TO CALCULATE THE PAYBACK PERIOD
The net cash flows (NCF) from an investment project are not the same for each time period
Miss
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above. To calculate the PBP (when the net cash flow or contribution is not a fixed amount per time period), there are several important steps:
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Calculate the cumulate net cash flows (see table above).
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Identify the year in which the cumulative NCF is equal to or greater than the initial cost of the investment (Year 4 in this example).
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Calculate the monthly NCF in that year (so in Year 4, the monthly NCF = $24,000 ÷ 12 = $2,000 per month.
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Find the shortfall to reach payback in the previous year ($78,000 – $74,000), i.e. the initial amount spent on the investment minus the cumulative NCF in the previous year before reaching payback.
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Divide the difference found in Step 4 by the answer in Step 3, i.e. $4,000 ÷ $2,000 = 2 months.
6.1
6.2
The PBP for Thornton Inc. is 3 years and 2 months. Because remember that we found the deficit to achieve recovery in the year before year 4, so it is year 3.
6.1
6.2
It's your turn!Solve the exercise together Upload it in
6.1
6.2
Cumulative Net Cash Flows
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Transcript
6.1
6.2
CUMULATIVE NET CASH FLOWS IN ORDER TO CALCULATE THE PAYBACK PERIOD
The net cash flows (NCF) from an investment project are not the same for each time period
Miss
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above. To calculate the PBP (when the net cash flow or contribution is not a fixed amount per time period), there are several important steps:
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Calculate the cumulate net cash flows (see table above).
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Identify the year in which the cumulative NCF is equal to or greater than the initial cost of the investment (Year 4 in this example).
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Calculate the monthly NCF in that year (so in Year 4, the monthly NCF = $24,000 ÷ 12 = $2,000 per month.
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Find the shortfall to reach payback in the previous year ($78,000 – $74,000), i.e. the initial amount spent on the investment minus the cumulative NCF in the previous year before reaching payback.
6.1
6.2
Suppose that Thornton Inc. is deciding whether to spend $78,000 on a new machine that is expected to generate the net cash flow over 5 years as shown above.
Divide the difference found in Step 4 by the answer in Step 3, i.e. $4,000 ÷ $2,000 = 2 months.
6.1
6.2
The PBP for Thornton Inc. is 3 years and 2 months. Because remember that we found the deficit to achieve recovery in the year before year 4, so it is year 3.
6.1
6.2
It's your turn!Solve the exercise together Upload it in
6.1
6.2