Payback period - TIDY Ltd

Sally5065

Hi,

This is my first time on the AAT forum.

Could anyone explain to me how to calculate a payback period. I am working through Tidy Ltd and seem to be stuck on this last bit!!!

Many Thanks

Sally

Sally5065

Payback period

Hi,

After some more reading it has clicked!!!!!!! Can't believe I was being so dozy!!

Thanks

Sally

Dipak Thanki

It's straight forward really,

The way I do is:

£000
Net Cash flows:
Cumulative :

In the Net cash flows, you directly get the ones from the NPV/NPC table, and then add the next net cash flow.

For example:

Year 0 being, £500 this is most likely to be capital expenditure, so you would use
(-£500), therefore the Cumulative cash flow being (-£500).
Year 1 being £400. You add the £400 to the (-£500), making the Cumulative cash flow for year 1 (-£100).
Year 3 being £300.

£000
Net Cash flows: -500 400 300
Cumulative: -500 -100 200

You then see where the net cash flow becomes positive. i.e £300. You then take the cumulative value from the year before (-£100) and divide it by 300.

When dividing DO NOT use the 100 as a negative.

So: 100/300 = 0.33* x 12 = 4

Always round up, when finding out how many months it requires.

Payback period = 1 year and 4 months.

Hope this helps :S.

Dipak

Sally5065

Thanks

Thanks for your help.

Regards

Sally