ExpertMedium2 marksShort Answer
ACCA · Question 21 · Budgeting
Section A
EuroTech Multinationals is evaluating a capital project. The initial investment is $100,000. The expected net cash inflows are:
Year 1: $30,000
Year 2: $40,000
Year 3: $50,000
Year 4: $20,000
Assuming cash flows occur evenly throughout the year, calculate the payback period in years. Enter your answer as a decimal to one decimal place (e.g., 2.5).
Section A
EuroTech Multinationals is evaluating a capital project. The initial investment is $100,000. The expected net cash inflows are:
Year 1: $30,000
Year 2: $40,000
Year 3: $50,000
Year 4: $20,000
Assuming cash flows occur evenly throughout the year, calculate the payback period in years. Enter your answer as a decimal to one decimal place (e.g., 2.5).
How to approach this question
Calculate cumulative cash flows. Find the year before payback is reached. Divide the remaining amount needed by the cash flow of the next year.
Full Answer
Cumulative cash flows: Year 0: -$100,000. Year 1: -$70,000. Year 2: -$30,000. At the end of Year 2, $30,000 is still needed. Year 3 generates $50,000. Time needed in Year 3 = $30,000 / $50,000 = 0.6 years. Total payback period = 2 + 0.6 = 2.6 years.
Common mistakes
Answering 3 years (rounding up) or calculating 2.4 years by dividing incorrectly.
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