Payback Period - ECR

anniebabe

Hi Guys

Can anyone explain how to calculate a part year on the payback period, looking at it in the Osborne book and somehow its not sinking in at the moment.

Many thanks

anniebabe

do you just divide the cash flow by 12 months ? and the remaining figure is the money that is left ? not sure why this has confused me.

sdv

anniebabe wrote: »

Hi Guys

Can anyone explain how to calculate a part year on the payback period, looking at it in the Osborne book and somehow its not sinking in at the moment.

Many thanks

yeat 0 Investment - 150,000

year 1 Net cash inflow + 30,000 -120,000 (investment recovered 30K)
year 2 Net cash inflow + 40,000 -80,000 (investment recovered 70K)
year 3 Net cash inflow + 50,000 -30,000 (investment recovered 120K)
Year 4 Net cash inflow + 60,000

from the above we can see that we have recovered £120,000 in 3 years
We now need to recover 30K from year 4

Assuming that the net cash inflow is constant throughout the year then it will take 6 months in year 4

calclulations - (30,000 / 60,000 x 12 months)

therefore payback = 3 years 6 months

anniebabe

Thanks SDV
Yes I understood the first part - it was the year 4 that confused me.
Still dont get it properly.
Hope it will click soon.

stranger

In Year three , how much outflow left to recover : £30,000
In Year four, how much incoming :£60,000

Assuming inflow is spread evenly, you do not need a whole year 4 to get your outflow, you just need half of year 4, hence this is how you do the calculation regarding year 4 :
£30,000/£60,000 X12months = 6 months

Hope it will click now

anniebabe

Thanks, everythings a bit of a fog at the moment, will get there - hopefully for the exam in 4 wks.

emma123

anniebabe wrote: »

Thanks, everythings a bit of a fog at the moment, will get there - hopefully for the exam in 4 wks.

Don't worry we'll wing it somehow!