ECR - unit6

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:30AM in AAT student discussion
Could anyone reply with definitions for payback, IRR and NPV?<BR>This would be really appreciated.<BR>Trog

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    ECR - unit6

    Payback is how long it will take to recoup your investment. Say you invest £50, 000 in a new machine, and your net profits are £15,000 p.a., you will achieve payback in year 4.<BR><BR>Scott.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    ECR - unit6

    The payback period is the time it takes to recoup back the initial cost of investment. <BR><BR>Net Present Value - Is the total of discounted cash flows less any negative cash flows.<BR><BR>IRR- The rate where the net present value is zero. Any rate below the recommended IRR would be accepted, as this would generate a surplus cash flow and any above the IRR, would be rejected as it would be a deficit.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    ECR - unit6

    Nearly right, Scotty. But payback uses net cash flow and not net profit (which is after allowing for depreciation). You would need to add back annula depreciation to the net profit to achieve the cash flow<BR><BR>Graham
  • System
    System Posts: 100,534 🤖 Admin 🤖
    ECR - unit6

    Hiya<BR><BR>I still don't understand Internal Rate of Returnn. I just have a mental block. Can anyone explain it to me using words of one syllable? :-)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    ECR - unit6

    Internal Rate of Return is the rate of the discount which when applied to a project`s cash flow results in a zero net present value

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