This ppt is helpful for school of management students to take decision related management and budgeting of the initial investment of the company this is also find out market scope of financial products in this ppt students are able to analyse the financial world to understand the basic knowledge of financial world

1. FINANCIAL
MANAGEMENT
Submitted to:- Ms.kangan
Submitted by :- Jaskaran singh
Navjot kaur
Golu kumar
Shivam
Lisa

2. TOPIC
TECHNIQUES OF CAPITAL
BUDGET PAYBACK PERIOD

3. The term payback period refers to the
amount of time it takes to recover the
cost of an investment. Simply put, it
is the length of time an investment
reaches a breakeven point.
MEANING

4. IT’s IMPORTANCE
• Quick Assessment
• Evaluation
• Simplicity
• Decision Making

5. ADVANTAGES
 Procedure is simple
 Helpful for small business
 Faster reinvestment of earnings
 Faster reinvestment of earnings

6. DISADVANTAGES
 Ignores the time value of money
 Not Realistic
 Ignores profitability
 Investments Are Not Appropriately Evaluated

7. HOW TO CALCULATE PAYBACK
PERIOD
Payback period is calculated by dividing the cost of the investment by the
annual cash flow until the cumulative cash flow is positive, which is the
payback year. Payback period is generally expressed in years.
There are two easy basis payback period formulas:
 Payback Period Formula – Averaging Method
 Payback Formula – Subtraction Method

8. Payback Period Formula – Averaging Method
Payback Period= Intial investment
yearly cashflow using the averagemethod
Payback Period = initial Investment/
For Example: If a company makes an investment of $1,000,000 in new
equipment which is expected to generate $250,000 in revenue per year.
What will be the calculation?
Solution: $1,000,000 / $250,000 = 4-year payback period
For example: If they have another option to invest $1,000,000 into
equipment which they expect to generate $280,000 in revenue per year.
What will be the calculation?
Solution: $1,000,000 / $280,000 = 3.57-year payback period

9. Payback Formula – Subtraction Method
Payback Period = The last year negative cashflow
+(amount of cash flow at the end off the year
Cash flow during the year after that year
For example: A company is considering making a $550,000 investment
in new equipment. The expected cash flows are as follows : Year 1 =
$75,000Year 2 = $140,000Year 3 = $200,000Year 4 = $110,000Year 5 =
$60,000
Solution: :Year 0 : -$550,000Year 1 : -$550,000 + $75,000 = -$475,000Year
2 : -$475,000 + $140,000 = -$335,000Year 3 : -$335,000 + $200,000 = -
$135,000Year 4 : -$135,000 + $110,000 = -$25,000Year 5 : -$25,000 +
$60,000 = $35,000Year 4 is the last year with negative cash flow, so the
payback period equation is:4 + ($25,000 / $60,000) = 4.42