GK
ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Profit
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Expenses
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Annual cash inflow
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Annual Sales flows
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Detailed explanation-1: -If cash inflows from the project are even, then the payback period is calculated by taking the initial investment cost divided by the annual cash inflow.
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. You may calculate the payback period for uneven cash flows.
Detailed explanation-3: -The cash payback period is computed by dividing the cost of the capital investment by the net annual cash inflow. The net present value method can only be used in capital budgeting if the expected cash flows from a project are an equal amount each year.
Detailed explanation-4: -The payback period is calculated by dividing the amount of the investment by the annual cash flow. Account and fund managers use the payback period to determine whether to go through with an investment. One of the downsides of the payback period is that it disregards the time value of money.
Detailed explanation-5: -Cash flow after taxes are used to compute the payback period. Depreciation is not considered for calculating cash flows (i.e. depreciation will not be deducted)