Payback Period....
System
Posts: 100,534 🤖 Admin 🤖
If the cash "inflows" you have are the sales figure, and you are ALSO given the variable costs, which one do you use to calculate the payback period? The sales figure? or the contribution? (sales - variable costs)
Your opinions would be much appreciated...thanks in advance
Kate
Your opinions would be much appreciated...thanks in advance
Kate
0
Comments
-
Re:Payback Period....
Contribution
... I think0 -
Re:Payback Period....
Thanks, that's what I did at first, but the payback period turned out to be like 2.01 years, and I thought that maybe i'd done it wrong. I can't find any examples of it in my book or anything.
Thanks again!
Kate0 -
Re:Payback Period....
Next question.....
Can a company have a required annual rate of return on a project, eg 15%, but in the question, they only give you the 10% present value discount factors. Does this mean that I should use the 10% values to discount my cash flows,and assume that the given annual rate of return is ONLY for the latter part of the question regarding the Internal Rate of Return?
Thanks in advance
Kate
0 -
Payback Period....KateCM wrote:If the cash "inflows" you have are the sales figure, and you are ALSO given the variable costs, which one do you use to calculate the payback period? The sales figure? or the contribution? (sales - variable costs)
Your opinions would be much appreciated...thanks in advance
Kate
Payback period has to be based on cash. I don't see how you could calculate a payback period based on sales and variable costs alone as you have no idea when the:
1. Debtors paid for the sales.
2. You paid the creditors/employees/whoever for the variable costs.0 -
Re:Payback Period....KateCM wrote:Next question.....
Can a company have a required annual rate of return on a project, eg 15%, but in the question, they only give you the 10% present value discount factors. Does this mean that I should use the 10% values to discount my cash flows,and assume that the given annual rate of return is ONLY for the latter part of the question regarding the Internal Rate of Return?
Thanks in advance
Kate
Sorry this dosen't really make sense to me, and i'm usually pretty good on that stuff (although IRR can be a nightmare to calculate)
Perhaps if you post the question word for word we could help?0 -
Re:Payback Period....
I'm stuck on that too. Ive been told the annual rate of return has to be 12% but theyve only given me the 10% values... I've done mine based on the 10% and assumed it means that the IRR has to be 12% for the project to be accepted :?
Haha I'm stuffed for ECR exam in December!
I'm hoping all of this will click into place before then.
I was finding this quite straightforward in the workshop but these questions I'm doing are much more complicated :evil:0 -
Re:Payback Period....
Gem 7321 - Are you doing a progress test? If so, same one!!!
That's what i've done too. I think I might just hand it in like that, and see what result I get. I've tried looking in the book, and there aren't any similar examples.
Well, I haven't got any info on debtors or creditors, so i'll just have to assume they're cash sales, and purchases NOT made on credit.
Only the results will tell....
Thanks everyone
0 -
Re:Payback Period....
For the payback period you just take the cashflow as sales revenue - variable costs. As these are projections the timing of payments/receipts, bad debts etc aren't really factors, just assume it's all cash.
Yes. The required annual rate of return is only applicable to IRR. The discounted cash flow method will give you a figure for the net present value of an investment. In general the higher the NPV the better.KateCM wrote:
Can a company have a required annual rate of return on a project, eg 15%, but in the question, they only give you the 10% present value discount factors. Does this mean that I should use the 10% values to discount my cash flows,and assume that the given annual rate of return is ONLY for the latter part of the question regarding the Internal Rate of Return?
Thanks in advance
Kate
To calculate the IRR you would need to work out the NPV for a range of interest rates, find the rate where the NPV is zero and compare that to the business's require rate. Complicated and time consuming and something I can't imagine ever being an exam/skills test task.
It would be useful to see the actual question, I'm a bit confused too.
Chris0 -
Re:Payback Period....
"To calculate the IRR you would need to work out the NPV for a range of interest rates, find the rate where the NPV is zero and compare that to the business's require rate. Complicated and time consuming and something I can't imagine ever being an exam/skills test task."
Yes interpolation is a bit fiddly I didn't think they would cover that on the AAT.0 -
Re:Payback Period....
It's not something we covered in the course and it the textbooks I have don't go into any detail. In last July's exam there was a memo type question asking what IRR is and I suspect that's about all that will be required with regard to IRR. Payback period and discounted cash flow are almost certain to be tested in more detail though.
Chris
0 -
Re:Payback Period....
Yes I think we're doing the same progress test!
I'm going to trust my judgement and do what I think and if my mark is awful then my tutors and fellow students will know something is wrong, which is what the progress test is for!
It's giving me a headache now though :? I think I'm thinking about it too much and should just do something with the information I'm given at face-value.
God the exam is in less than 4 weeks
0