Calculating Payback Periods for Investment Appraisal

The video tutorial explains the concept of payback periods in investment appraisal, detailing how businesses can calculate the time it takes to recover an initial investment outlay. It covers the calculation process, including cash flow forecasts and cumulative cash flow analysis. An example is provided to illustrate the calculation, and alternative methods are discussed. The tutorial also addresses variable cash flows and how to handle them in payback period calculations. Graphical representation of payback periods is also demonstrated.

What does the payback period indicate in investment appraisal?

• The total cash flow generated

• The total profit from an investment

• The time taken to recover the initial investment

• The interest rate of the investment

Why might a business choose a project with the shortest payback period?

• It indicates the highest profit

• It requires the least initial outlay

• It has the highest cash flow

• It reduces risk by recovering the investment quickly

Which of the following is NOT considered when calculating the payback period?

• Initial investment outlay

• Cumulative cash flow

• Net cash flow

• Market share of the company

In the example of the engineering firm, what is the annual net cash flow?

• £30,000

• £10,000

• £40,000

• £20,000

What is the payback period for the engineering firm's investment?

• 6 years

• 5 years

• 4 years

• 3 years

How is the payback period graphically represented?

• Line graph

• Scatter plot

• Pie chart

• Bar chart

What is the formula for calculating the payback period when cash flows are constant?

• Total cash flow divided by net cash flow

• Net cash flow divided by initial outlay

• Initial outlay divided by total cash flow

• Initial outlay divided by net cash flow

When cash flows are not constant, what additional calculation is needed to find the payback period?

• Average cash flow

• Specific year payback period formula

• Total investment divided by years

• Net present value

What is the outstanding outlay at the end of year three in the non-constant cash flow example?

• £50,000

• £30,000

• £29,000

• £40,000

How do you calculate the monthly payback cash flow in the fourth year?

• Divide annual cash flow by 6

• Divide annual cash flow by 12

• Multiply annual cash flow by 12

• Subtract maintenance costs from annual cash flow