790 Words4 Pages

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 of the project is even or uneven. In case they are even, the formula to calculate payback period is: Payback Period = Initial Investment Cash Inflow per Period When cash inflows are uneven, we need to calculate the cumulative net cash flow for each period and then use the following formula for payback period: Payback Period = A + B C In the above formula, A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A Profitability Index is an investment appraisal technique calculated by dividing the present value of future cash flows of a project by the initial investment required for the project. Formula: Profitability Index = Present Value of Future Cash Flows Initial Investment Required = 1 + Net Present Value Initial Investment Required Explanation: Profitability index is actually a modification of the net present value method. While present value is an absolute measure (i.e. it gives as the total dollar figure for a project), the profitability index is a relative measure (i.e. it gives as the figure as a ratio). Decision Rule Accept a

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## Tasty Foods

2696 Words | 11 Pages417). In other words, these are the cash flows that will only occur if we do accept the project. Answer: When determining the incremental cash flows related to the project, we should not include interest expense, even if the project will be partly financed by debt. We will take the interest cost into consideration when we perform the net present value analysis on these cash flows. At that point, the required rate of return we will use will be a rate that

## Case Study on Mini Hydro Power Plant & a Tea Factory

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## Caledonia Products Integrative Problem

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## Lockheed Case

729 Words | 3 Pages1. a) Payback Period= Investment/Cash Flow per Year = 35,000/5000 = 7 year Computation of NPV: NPV= C0 + PV [PV= C0 + Σi=1t Ct/(1+r)t] =C0 +C[1/r – 1/r(1+r)t] = -35,000+ 5000[1/.12 - 1/.12(1+.12)15] = -35,000 + 5000[1/.12 – 1/.657] = -35,000 + (5000 * 6.81) = -945.68 i.e. $ -945.68 Computation of IRR: 0= -35,000 + Σ t i=1 5000/(1+IRR)t = 11.49% Rainbow Products should not purchase the machine because it is not profitable whether you utilize the NPV method or the

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4624 Words | 19 PagesLesson Plan on Capital Budgeting Capital Budgeting - process of deciding whether or not to commit resources to projects whose costs and benefits are spread over several time periods. Characteristics of a Capital Investment Decision: 1. Substantial amount of funds are required in capital projects. 2. Because of the length of time span by a capital investment decision, the element of uncertainty becomes more critical. 3. The effect of managerial errors will be difficult to reverse

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1457 Words | 6 Pagesby the contribution per unit. To calculate the contribution per unit you do the selling price minus the variable costs. Racquets - £225 Producing - 6000 units Labour - 27000 hours Materials - £44 X 6000 = £264,000 Labour - £12 X (4.5 hours x 6000) = £324,000 Variable overheads production – 10 x 4.5 = 45 x 6000 = £270,000 Total Expenses - £858,000 + 161,000 + 126,000 = 1,145,000 BEP – £225 x 6000 = 1,350,000 £1,350,000 – £858,000 = 492,000 divides by 6000 = 82 contribution per unit £161,000 + £126

### Goodweek Tires, Inc.

2095 Words | 9 Pages### Tasty Foods

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729 Words | 3 Pages### Chapter 7— Net Present Value and Other Investment

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4624 Words | 19 Pages### The Total Contribution Cost Ratio

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