payback period

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I have bin trying to get my head round this all day but i cant figure out how it works wot the formula is for this help!!!!!!!!!!!!!

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    There is no formula as such. You need to work out the net cash flow for each year ie: total sales revenue less variable costs.<BR><BR>For example:<BR>Invest in a peice of machinery for £5,000. Cash inflows during the 4 years are as follows:<BR><BR>Year 1 1,200<BR>Year 2 3,000<BR>Year 3 3,500<BR>Year 4 3,500<BR><BR>You then work out the cumulative cash flow:<BR><BR>Year 0 (£5,000)<BR>Year 1 (3,800)<BR>Year 2 (800)<BR>Year 3 2,700<BR>Year 4 6,200<BR><BR><BR>You can see that by year 3 the cost of the original investment has been paid but you need to find out how far into year 3 was the cost recoupe.<BR><BR>So you take 800/3500x12=2.74months<BR><BR>So total payback is 2 years and 3 months or if you don't bother dividing by 12 to get the months its 2.23 years.<BR><BR>Hope this helps
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    How do you calculate the net cash inflows?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    No worries, now know. Income less expenditure (not inlc depn), right? Will the paper state the net cash flow for each year in the question?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Duh! I see now. Cheers for your help Petrol Monkey. I'm now very confident on some areas and understand all the others. Hope this paper turns out to be as easy as the Foundation one last year (probably easiest paper I ever sat, and if you knew me you'd know the magnitude of that comment! <img src="i/expressions/face-icon-small-tongue.gif" border="0">)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    The labour should come from 1.2. Calculate the numbers of shirts produce.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Ignore the purchases one, I see now that it is only the issues from the stock card :-P
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Cheers! One last thing, from ECR June 2004, Task 1.6. The answer says Materials is 12,450, which is 300 less than my final stock balance from my stock card in Task 1.1. Also, where do I get the Direct labour of 6,500 for the stitching department?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Correct<BR><BR>Year 0 = 1.00<BR>Year 1 = 0.892 (1/1.12)<BR>Year 2 = 0.797(1/1.12/1.12)<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Yep, I understand all those areas. Just read one of your posts about how to calculate rate of return, eg<BR><BR>10%<BR><BR>Year 0 : 1.00<BR>Year 1 : 0.909 (1/1.10)<BR>Year 2 : 0.826 (1/1.10/1.10)<BR><BR>Tried this for 12%, and it is simply 1/1.12 etc.<BR><BR>Cheers
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    It does help, thanx, good luck 2day
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    A) This relates to limiting factors I assume, so if you have product A, B and C, you need to calculate the contribution per unit. Then if you have a limited number of direct labour hours, you need to find out the amount of time you need to product 1 unit using that scare resource.<BR><BR>Then to find out the contribution per direct labour hour you divide the contribution by the direct labour hour spent per unit. Once you have done this you have rank the products in order of the highest contribution per direct labour to the lowest. Then you work out the numbers of units you can produce using the ranking and number of labour hours available.<BR><BR>B)Correct Fixed cost/Contribution or Fixed costs+profit/contribution or fixed costs/PV Ratio(Contribution/sales ratio)<BR><BR>C) Reorder stock level= (maximum usage x maximum lead tim) + buffer stock
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    OK, it's only a few things really. <BR><BR>1. When calculating how many units of say (A B and C), would you maximise production of the items with the highest cont. and leftover machine hours on the last, and lowest cont.?<BR><BR>2. To calculate how many units to break even: FC/Cont, and to make a profit of say £3,000, FC+3,000/Cont?<BR><BR>3. Reorder of stock: Buffer level + (budgeted usage x time for order to be received)?<BR><BR>Cheers for your help!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    no i'm afraid but it you want to post anything then in suvject just mark FAO petrol monkey and I will pick up.<BR><BR>Ta
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Good-o. Do you have an msn addy, so I could possibly ask you a few questions?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Also will we be given the % present value factor or will we have to calculate it? If so how would we calculate it?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    sorry ive done too much studying and making it up but it does give you the sales revenue and variable cost so all you have to do it take sales-cost.<BR><BR>Good luck
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    Which paper is that? June or December?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    payback period

    You are correct in that you do not include depreciation. The exam will quite often just give you the investment value and any cash you receive in the year 1, 2, 3 and its up to you to figure it out.<BR><BR>Best to lay it out on a column form.<BR><BR>We may be lucky, ECR 2004 actually gave you the net cash flows and you just had to work out the payback and NPV

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