The payback method of capital investment appraisal-ACCA F9
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The payback method is used to calculate the time it takes for the cash inflows of a capital investment project to repay the initial cash outflows. It is often used as an initial screening method to evaluate whether a project's payback period is acceptable. While simple to calculate, it ignores cash flows after payback and the time value of money. A more sophisticated analysis is needed to fully evaluate a project if it meets the payback criteria.
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when start a new business, it needs to calculate how much profit a company would earn. In doing so, it is important to consider "time value money" and some uncertainty factors. Thus return on capital investment should not only rely on rate of return and/or payback.
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The document discusses various investment appraisal techniques including net present value (NPV), profitability index (PI), capital rationing, effects of inflation and taxation, replacement decisions, and delaying projects. It provides definitions and examples of each technique. For capital rationing situations, it explains how to use the profitability index to rank projects when funds are limited. It also discusses how to account for changing prices and inflation in cash flow forecasts, as well as the timing and amount of tax payments. The document concludes with explanations of how to evaluate replacement decisions using annual equivalent value (AEV) and situations where delaying a project could be advantageous.
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This is my small presentation if any dout then mail me i'm try to solve your dou my mail id is:subhashrohit10693@gmail.com
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This pdf is only to learn payback, timevalue of money and IIr
and there example are also given by me to easy to lean there example if any doute then contact me...
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when start a new business, it needs to calculate how much profit a company would earn. In doing so, it is important to consider "time value money" and some uncertainty factors. Thus return on capital investment should not only rely on rate of return and/or payback.
Report advanced investment appraisal
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This document discusses various methods for appraising investments, including:
- Discounting future cash flows to calculate net present value using an appropriate discount rate.
- Considering the timing of cash flows, as cash received sooner is more valuable than cash received later.
- Using metrics like internal rate of return, payback period, and accounting rate of return, but recognizing their limitations compared to net present value.
- Selecting projects that yield returns above the minimum acceptable rate, with the rate being higher for riskier projects.
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The Payback Analysis answers the questions: How long before I get my money back? Which of these investments is financially better?
Payback period time value of money ad internal rate ofreturn
This is my small presentation if any dout then mail me i'm try to solve your dou my mail id is:subhashrohit10693@gmail.com
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and there example are also given by me to easy to lean there example if any doute then contact me...
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Week 1 investment appraisal
* Machine cost: $102,700
* Annual net cash inflows:
Year 1: $21,600
Year 2: $28,200
Year 3: $31,600
Year 4: $38,200
Year 5: $42,000
* Cumulative cash inflows:
Year 1: $21,600
Year 2: $21,600 + $28,200 = $49,800
Year 3: $49,800 + $31,600 = $81,400
* Payback period = Cost of investment / Annual cash inflow
= $102,700 / $31,600 = 3.25 years
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The document discusses various capital budgeting techniques used to evaluate long-term investment projects. It describes traditional methods like payback period and accounting rate of return, as well as discounted cash flow methods like net present value, internal rate of return, and profitability index. These time-adjusted methods account for the time value of money and required rate of return when analyzing projects. The document also discusses factors that introduce risk and uncertainty into capital budgeting decisions.
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1) Time value of money is an important concept in capital budgeting where the value of cash flows depends on when they occur due to interest rates.
2) To calculate the net present value (NPV) of a project, one discounts each cash inflow to its present value using the appropriate discount factor and sums these values, then subtracts the present value of cash outflows.
3) NPV is the preferred method for evaluating projects as it considers the timing of all cash flows, but payback period can also be considered to account for uncertainty in long-term cash flows.
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This document discusses various capital budgeting techniques used to evaluate investment projects, including:
1. Discounted cash flow methods like net present value (NPV), internal rate of return (IRR), and profitability index (PI).
2. Non-discounted cash flow methods like payback period, discounted payback period, and accounting rate of return (ARR).
It provides formulas, examples, and decision rules for calculating each method and comparing investment opportunities.
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This document discusses risk, uncertainty, and techniques for quantifying risk in investment project appraisal. It defines risk as involving outcomes that can be assigned probabilities based on past experience, while uncertainty involves outcomes that cannot be quantified. It then describes probability analysis and expected values as a method to quantify risk by calculating probability-weighted average cash flows. Sensitivity analysis is presented as a key technique to analyze how responsive a project's NPV is to changes in variables. The example shows how to calculate sensitivity percentages to determine which variables a project's NPV is most sensitive to.2018_L7_CAPITAL_BUDGETING__INVESTMENT_APPRAISAL_TECHNIQUES_-_Final-1.docx
The document discusses various capital budgeting techniques for evaluating investment projects. It begins by introducing capital budgeting and some key concepts. It then describes the payback period method and its limitations, such as ignoring cash flows after the payback point and not accounting for the time value of money. The document also discusses the discounted payback period method and the accounting rate of return (ARR) method. It provides examples and evaluates the strengths and weaknesses of each technique.
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Hope you guys find it useful, I have tried to explain NPV and payback period in simple yet comprehensive manner.
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2) With NPV, future cash flows of a project are discounted to give their present value, and the project's NPV is calculated as the present value of cash inflows minus the initial investment.
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Week 1 investment appraisal
* Machine cost: $102,700
* Annual net cash inflows:
Year 1: $21,600
Year 2: $28,200
Year 3: $31,600
Year 4: $38,200
Year 5: $42,000
* Cumulative cash inflows:
Year 1: $21,600
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* Payback period = Cost of investment / Annual cash inflow
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Therefore, the payback period is
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Faculty of Law and Management
FUNDAMENTALS OF FINANCE
Lecture 5: Investment Evaluation Techniques
Presented by:
Dr Balasingham Balachandran
Professor of Finance
Department of Finance, La Trobe Business School
Investment Evaluation Techniques
2 These slides have been drafted by the La Trobe University School of Economics & Finance based on Berk (2011).
Topic Overview
Introduction to capital budgeting and investment
evaluation
Net Present Value (NPV)
Internal Rate of Return (IRR)
Payback Period (PP)
Accounting Rate of Return (ARR)
Choosing between projects when resources are
limited
These slides have been drafted by the Department of Finance, La Trobe Business School based on Berk (2014).
Investment Evaluation Techniques
Learning Objectives
Understand alternative decision rules and their
drawbacks
Choose between mutually exclusive investments
Rank projects when a company’s resources are
limited so that it cannot take all positive- NPV
projects
3
Investment Evaluation Techniques
4
The investment decision entails deciding which projects or investments
should be undertaken
Companies need to use investment evaluation techniques to determine
the value of the projects available to them
The final decision as to which projects a company should undertake is
known as ‘capital budgeting’
In this topic we will apply a number of techniques to the valuation of
individual projects
Investment evaluation and capital budgeting
Investment Evaluation Techniques
5
When a corporation allocates funds to long-term investment
projects, the outlay is made in the expectation of generating
future cash flows
In making the decision to invest in a project, the key
consideration is whether or not the proposal provides an
adequate return to investors
The process used to select projects to invest – capital budgeting
– is essentially a process to decide on the optimum use of scarce
resources
Investment evaluation and capital budgeting
Investment Evaluation Techniques
6
There are three fundamental stages in making capital budgeting
decisions:
Stage 1 is the forecasting of costs and benefits associated with a project – the most
important being the financial ones
Stage 2 involves the application of an investment evaluation technique to decide
whether a project is acceptable, or optimal amongst alternative projects
Stage 3 is the ultimate decision to accept or reject a project
The capital budgeting process
Investment Evaluation Techniques
7
In this lecture we will discuss the four best-known
investment evaluation techniques
Two of these are based on the discounted cash flow
(DCF) model:
Net present value (NPV)
Internal rate of return (IRR)
The other two are accounting-based techniques:
Payback
(Average) accounting rate of return (ARR)
Investment evaluation techniques
Investment ...
Capital budgeting
Capital budgeting involves planning expenditures for long-term assets that provide returns over several years. It is an important process that requires evaluating projects carefully due to their large size, long-term implications, and irreversible nature. Key aspects of capital budgeting include identifying and evaluating investment proposals, determining which provide the highest expected rates of return, and preparing a capital expenditure budget. Various techniques can be used to evaluate projects, including payback period, accounting rate of return, net present value, internal rate of return, and risk-adjusted methods that account for uncertainty in projected cash flows.
Similar to The payback method of capital investment appraisal-ACCA F9 (20)
2018_L7_CAPITAL_BUDGETING__INVESTMENT_APPRAISAL_TECHNIQUES_-_Final-1.docx
2018_L7_CAPITAL_BUDGETING__INVESTMENT_APPRAISAL_TECHNIQUES_-_Final-1.docx
Capital budgeting rules npv, irr, payback, discounted payback, aar « cfa tutor
Capital budgeting rules npv, irr, payback, discounted payback, aar « cfa tutor
Group 3 Capital_Budgeting_Techniques- Dr. Vijay Shankar Pandey.pdf
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Faculty of Law and Management FUNDAMENTALS OF FINANCE .docx
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The payback method of capital investment appraisal-ACCA F9
- 1. The payback method of capital investment appraisal By Shawn Bourne
- 2. What is payback ? Payback is the time it takes the cash inflows from a capital investment project to equal the cash outflows( cash inflows=cash outflows). The time it takes for a project to repay its initial investment. The payback period can be expressed in days or years. Payback is often used as a first screening method, by this we mean that when a project is being considered, the first question to ask is: How long will it take to pay back its cost? A project should not be evaluated on the basis of payback alone. If a project gets through the payback test, it ought then to be evaluated with a more sophisticated investment appraisal technique.
- 3. Example Example A company bought a machine for $500,000 and has the following cash flows: YearCash flows details Cash flow ($) Cumulative cash flow Payback? 0Initial cost(outflow) - 400,000.00 - 400,000.00 No 1Cash inflow 100,000.00 - 300,000.00 No 2Cash inflow 150,000.00 - 150,000.00 No 3Cash inflow 75,000.00 - 75,000.00 4Cash inflow 150,000.00 75,000.00 3 + (75,000) = 3.5 years 150,000
- 4. Advantages and Disadvantages of the payback method: Advantages: 1. Simple and easy to calculate and understand. 2. Uses cash flows. 3. Give speed of return of investment. 4. It can used first as a screening device at a first stage to eliminate inappropriate projects prior to a more detailed evaluation. 5. It can be used when there is a capital rationing situation to identify those projects which generate additional cash for investment quickly. Disadvantages: 1. It ignores the cash flows after the end of the payback period and therefore the total project return. 2. It ignores the time value of money. 3. It is unable to distinguish between projects with the same payback period. 4. It may lead to excessive investment in short-term projects. 5. It ignores the timing of cash flows within the payback period.