Management Costing

Claudine71

In task 1 do I take away the scrap value from the total I get at the end of year 5 or do I take it away from the initial investment and then work out the payback period?

mcchoc

No.. . payback period uses unadjusted cash flows. Imagine the whole thing is simply a bank account. Your initial investment will put you well into the red. Subsequent inward cash flows will reduce the overdraft until you burst through 'sea level'. that point is the payback period. The very last 'predicted' transaction is selling the fixed asset for cash - but that money won't arrive until the end of the last year of the project.

milescpareview

The payback period is the length of time it takes for the initial cash outlay for the investment to be recovered in cash (Note that the cash inflow is not the same as the income since depreciation is not subtracted in the determination of net cash flow).

If the cash flow is the same each year, then it equals the initial investment divided by the annual net cash inflow. If the cash inflow in uneven, start with the initial investment and then subtract each year's inflow until the entire investment has been recovered. Consider the scrap value to be the cash inflow in the last year (on selling the investment).

Claudine71

Thank you both ?