# payback peroid &amp; net present value (COSTING)

Registered Posts: 4 New contributor ?
Hi all,

Wondering if any one can help me because im doing late revision and have forgotten how to work out the payback peroid and net present value!!

I am working through all the past papers and although I have the answers I dont no how they got these figures! aahh!

Working on december 2003 costing and year the data is:

year 0 year 1 year 2 year 3 year 4

capital ex 500 - - - -
sales rev - 200 500 800 200
variable costs - 140 350 480 120
10% present 1.000 0.909 0.826 0.751 0.683

what is the payback peroid? i no the answer is 2.9 years but could I have a formula please some one!

and final question NET PRESENT VALUE

year 0 year 1 year 2 year 3 year 4

net cash flows (500) ? 60 ?150 ?320 ?80
present value fact 1.000 0.909 0.826 0.751 0.683
present values ?(500) ?54.54 ?123.90 ?240.32 ?54.64
net present value ?(26.60)

where theres question markes these are the answers and I just want to no the formulas for these!!

If any one can show me i really appreciate this!

thanks

• Registered Posts: 711
Ok.. for the payback period.. the cash flows each year (sales rev-variable costs) would be

Year 0 (500) which is the initail cash outlay
Year 1 60
Year 2 150
Year 3 320
Year 4 80

If you add these together, the comany would break even between year 2 and 3. So 2 years + (290/320) = 2.9 years

As for the NPV you add all the present values together (500)+54.54+123.90+240.32+54.64 = (26.60)

Hope this helps!
• Registered Posts: 4 New contributor ?
hi thanks for the reply I can kinda see how you do it now however im still confused !!

i can see now where you break even is between year 2 and year 3 but that (290/320 does not come to 2.9 years still dont understand that and aswell the npv how do you work out the present values ?!

thanks again if you could reply!
• Registered Posts: 711
290/320 = 0.9

2 years + 0.9 = 2.9 years!

To get the present values you times the present cash flow by the factor.

(500) x 1.000 = (500)
60 x 0.909 = 54.54
150 x 0.826 = 123.9
320 x 0.751 = 240.32
80 x 0.683 = 54.64

Any clearer?
• Registered Posts: 4 New contributor ?
i understand now what you have said for payback but where did you get 290 from ??!!! lol cheers
• Registered Posts: 4 New contributor ?
hi thanks for helping me out, still dont understand where the 290 has come from but i have found that break even is 500. and its was 30 over (530) so i just done 30/320 = 0.09 so 2.9 years hope i can use this formula!
• Registered Posts: 166 ? ? ?
year cost cumulative
0 500 500
1 60 440
2 150 290
3 320 -30

pay back somewhere between years 2 and 3 290/320 =0.9
I put a box around the two figures i have to divide to remind me
what to do
• Registered Posts: 62 ? ? ?
I had to tell myself a little story to get this formula in my hea
I am using esme's figs here....

Year 0 (500) which is the initail cash outlay
Year 1 60
Year 2 150
Year 3 320
Year 4 80

(500) + 60.00 = (440) at end of year 1
(440) + 150.00 = (290) at end of year 2
(290) + 320 = 30 at end of year 3

If you only needed an extra £290 at the end of year 2 before it was paid back - then you need £290 out of Year 3's £320 - hence 290/320 (this is added to the 2 years you have already established.

The only problem with this is - who the hell says 2.9 years!

Therefore if you calculate (290/320) x 12 months in a year = 10.87 MONTHS

i.e Payback occurs just under 2 years 11 months
• Registered Posts: 160 ? ? ?
My tutor also worked out 2.9 years and I have been wondering where 2.9 comes from I too got 10.87. Tutor says 290/320 x 12 which gives you 10.87 months. Thought I was going mad.