Case Study on Mini Hydro Power Plant & a Tea Factory

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AccountingExplained * Financial Accounting * Managerial Accounting * Miscellaneous ------------------------------------------------- Top of Form Bottom of Form Home >Managerial Accounting >Capital Budgeting > Payback Period | | | Payback Period Payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques. Formula The formula to calculate payback period of a project depends on whether the cash flow per period from the project is even or uneven. In case they are even, the formula to calculate payback period is: Payback Period = | Initial Investment |…show more content…
Let’s assume that a company invests $400,000 in more efficient equipment. The cash savings from the new equipment is expected to be $100,000 per year for 10 years. The payback period is 4 years ($400,000 divided by $100,000 per year). A second project requires an investment of $200,000 and it generates cash as follows: $20,000 in Year 1; $60,000 in Year 2; $80,000 in Year 3; $100,000 in Year 4; $70,000 in Year 5. The payback period is 3.4 years ($20,000 + $60,000 + $80,000 = $160,000 in the first three years + $40,000 of the $100,000 occurring in Year 4). Note that the payback calculation uses cash flows, not net income. Also, the payback calculation does not address a project’s total profitability. Rather, the payback period simply computes how fast a company will recover its cash investment. Finance Formulas * ------------------------------------------------- * ------------------------------------------------- * ------------------------------------------------- *
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