Payback period help needed quickly please...

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi<BR><BR>I am calculating the payback on last december's paper for ECR. I have the answer paper and the answer is 2.9yrs.<BR><BR>The answer I get, based on what my textbook tells me is 2.11yrs rounding it up. <BR><BR>Basically, I did the calculation based on 290k needed from net cash flow of 320k in year 3. So, 290/320 x 12 to convert it into months. My lecturer says I should stop at the 290/320 answer, which is 0.90625, and not to do the x 12 part. But I thought you had to convert that into months???<BR><BR>Help please, and before Monday if you can!<BR><BR>

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Payback period help needed quickly please...

    Some textbooks and lecturers (not yours fortunately) try to be more precise than is realistic when calculating payback periods<BR>I tell my students that if they work somewhere where cash flows accrue evenly each year, then they are in a miniscule minority.<BR>Cash flows are up and down from one month to the next to varying degrees from one business to another.<BR>So if you know that the net cash inflow will cover the initial cost at sometime in the third year you are as accurate as you can be.<BR>Fair enough, if the examiner (and I'd be surprised to see the current ECR examiner actually say this, as he is a real life accountant) says you should treat cash flows as accruing evenly over the years, then you can say it takes 2.9 years.<BR><BR>But note this, if you don't say the bit about accruing evenly, you may be judged to not be competent on this area. <BR><BR>There is no extra mark for converting into months - it doesn't tell you any more than 2.9 years, so don't use you exam time doing it.<BR><BR>I hope that is clear. You are not alone with this query<BR><BR>sandy.hood@chichester.ac.uk
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Payback period help needed quickly please...

    Another thought <BR>Many investment appraisal questions state..."assume all operating cash flows take place on the final day of the year"<BR>If that is taken literally, how can you calculate a payback period in anything less than whole years?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Payback period help needed quickly please...

    Hi,<BR><BR>Don't worry this is quite simple but easy to get confused. I know I did at first :-)<BR><BR>You are absolutely right in your calculations!<BR><BR>The only difference is that you have taken the next step and worked out the payback period in years and months. The solution is only in years and part years. <BR><BR>so:<BR>£000's<BR>(500) = (500) year 0<BR>+60 = (440) year 1<BR>+150 = (290) year 2<BR><BR>then 290/320 = 0.90625<BR><BR>This is where they get <BR><BR>2.9 years<BR><BR>but 0.90625 x 12 = 10.875 or 11 if rounded up<BR><BR>is... 2 years 11 months.<BR><BR>I generally go the step further and then express my answer in years and months.<BR><BR>Hope this helps.<BR><BR>Good luck for next week!<BR><BR>

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