GENERAL KNOWLEDGE

Detailed explanation-1: -When cash flows are not uniform, the comulative cash flow is calculated to find the payback period of an investment. Comulative cash flow depicts the year before recovery of Investment and the Unrecovered cost of an investment.

Detailed explanation-2: -To calculate the payback period you can use the mathematical formula: Payback Period = Initial investment / Cash flow per year For example, you have invested Rs 1, 00, 000 with an annual payback of Rs 20, 000. Payback Period = 1, 00, 000/20, 000 = 5 years.

Detailed explanation-3: -The Payback Period method does not take into account the time value of money and treats all flows at par. For example, Rs. 1, 00, 000 invested yearly to make an investment of Rs. 10, 00, 000 over a period of 10 years may seem profitable today but the same 1, 00, 000 will not hold the same value ten years later.

Detailed explanation-4: -To determine how to calculate payback period in practice, you simply divide the initial cash outlay of a project by the amount of net cash inflow that the project generates each year. For the purposes of calculating the payback period formula, you can assume that the net cash inflow is the same each year.