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1. Payback Period,
Time Value of
Money &
Internal Rate of
Return
Presented By:SUBHASH ROHIT

2. Payback Period
Def i ni t i on:
The Payback
peri od i s t he amount
of t i me t hat i t t ake
t o recover your cos t s
i n a proj ect .

3. FORMULA: Payback
Period Even Or Uneven
 Even:
Payback Period = I nit ial I nvest ment /
Annual Cash f lows
 Uneven:
Paybeck Period=A+(B/ C)
Where; A=The Last period wit h a negat ive
cumulat ive cash f low
B=The absolut e value of cumulat ive cash

4. Example
Even Cash Flow:
Company Cis planning to undertake a project requiring initial
investmentof$105million. Theprojectisexpectedtogenerate
$25millionperyearfor7years. Calculatethepaybackperiodof
theproject.

5. Cont..
Payback Period = I nit ial
I nvest ment / Annual Cash f lows
=$105/ $25
=4.2 year

6. Cont..
Uneven Cash Flows.
CompanyCisplanningtoundertakeanotherprojectrequiringinitial
investmentof$50millionandisexpectedtogenerate$10million
inYear1, $13millioninYear2, $16 millioninyear3, $19
millioninYear4and$22 millioninYear5. Calculate the
paybackvalueoftheproject.

7. Cont..
Payback Period
= 3 + (| -$11M| ÷
$19M)
= 3 + ($11M ÷
$19M)
(cash flows in millions)
Year Cash Flow
Cumulative
Cash Flow
0 50 -50
1 10 -40
2 13 -27
3 16 -11
4 19 8
5 22 30

8. Payback Period Rule
The Decision Rule: t he act ual
payback is compared wit h a
predet ermined pay back, t hat
is, t he pay back set by t he
management in t erms of t he
maximum period during which
t he invest ment must
recovered.

9. Advantage of
Payback PeriodI t is very simple. I t is easy t o
underst and and apply
 I t is cost ef f ect ive
The payback per iod measures
t he direct relat ionship bet ween
annual cash inf lows f rom
Proposal and t he net invest ment
r equir ed

10. Disadvantage Of
Payback Period
The pay back period ent irely
ignores t he cash inf lows t hat
occur af t er t he pay back
period
The pay back period also
ignores salvage value and
t ot al economic lif e of t he

11. Drawbacks of
Payback PeriodDoes not consider all of t he
proj ect ’s case f lows.
This proj ect is clearly
prof it able, but we would

12. Time Value Of Money
The concept modern f inance
and management .
We say t hat money has a t ime
value because t hat money can
be invest ed wit h t he
expect at ion of earning a
posit ive rat e of ret urn

13. Calculations based on the
time value of money
Present Value - An amount of
money t oday, or t he cur rent
value of a f ut ure cash f low
Future Value - An amount of
money at some f ut ure t ime
per iod
‘n’ is t he number of periods
‘r ’ is t he rat e at which t he

14. Cont…
PV(A) t he value of t he annuit y
at t ime = 0
FV(A) t he value of t he annuit y
at t ime = n
‘A’ t he value of t he individual
payment s in each compounding
per iod
‘n’ is t he number of periods

15. Formulas
Present value of a future sum
/ Future value of a present
sum.

16. Example
 Consider 2 sit uat ions
 Opt ion A: You receive Rs.
10,000 t oday.
 Opt ion B: You receive Rs.
10,000 in 3 years t ime
 Assume no inf lat ion
 Assume int erest rat e 10%

17. Future Value
Calculation
Consider Opt ion B
Let ’s calculat e t he f ut ure value
of Rs. 10,000 received at t he
present t ime.

18. Cont..

19. Present Value
Calculation
Similarly using t he equat ion as

20. Cont..
t he present value of Rs. 10,000
received in 3 years when t he
int erest r at e is 10% can be

21. Cont..

22. (Internal Rate of
Return) IRRThe I RR should be applied only
f or very simple invest ment s.
I nt ernal rat e of r et urn (I RR) is
t he discount rat e at which t he
net present value of an
invest ment becomes zero. I n
ot her words, I RR is t he
discount rat e which equat es t he

23. Cont…
Decision Rule
 St and-alone Proj ect s
 I f I RR >cost of capit al
(k) ⇒ accept
 I f I RR <cost of capit al
(k) ⇒ rej ect

24. IIR Calculation
 Formula

25. Cont..
FindtheIRRofaninvestmenthavinginitialcashoutflowof
$213,000. Thecashinflowsduringthefirst, second, thirdand
fourthyearsareexpectedtobe$65,200, $96,000, $73,100and
$55,400respectively.
Assumethatris10%.

26.  NPV at 10% discount rat e =
$18,372
Since NPV is great er t han zero
we have t o increase discount
rat e, t hus
NPV at 13% discount rat e =
$4,521
But it is st ill great er t han zero
we have t o f urt her increase t he
discount rat e, t hus
NPV at 14% discount rat e = $204

27. Cont…
First , imagine a sit uat ion in
which you invest $1 million
t oday and t hen receive
$500,000 per year f or t he next
4 years. That invest ment gives
an I RR of 35%, which would be
pret t y good by t oday’s
st andards. Now let ’s change

28. I f inst ead you had t o invest only
$500,000 up f ront f or t he same
amount of ret urn, t he I RR
improves t o 93%.For t hose of you
unf amiliar wit h t he t erminology, a
proj ect wit h an I RR of 93% is bot h
r ar e and ver y desirable t o pursue.
The reduct ion in t he up-f r ont
invest ment caused t he ret urn t o
skyrocket .

29. CONCLUSION
Any t ime you ar e evaluat ing an
invest ment over t ime, use t ime-
value-of -money.
I n f inancial modelling, allow f or
bot h t ime-value-of money
calculat ions as well as
uncert aint y t o impr ove your
proj ect ions and t he decisions on

30. Thank
You…!