PAY BACK PERIOD  PBP

03262011, 09:14 PM
Post: #1




PAY BACK PERIOD  PBP
Salaam Awl!
I have a query regarding PBP, PLs inform me through ur best knowledge and experience that wat is the role of cost of capital in PBP?? a question is as under for your information Company A invest in project, initial investment required Rs. 75,000 for 5 years cash inflows are (15,000 12,000 8000 34,000 55,000). cost of capital is 5% p.a. IN MY UNDERSTANDING PBP= (Cash flow required) divided by (cash flow for the year)x 12 so according to me, the investment shall recover in 4 years & 1 month. But em still not understand that why the COST OF CAPITAL is given in this question, Pleases explain as soon as possible. Regards Umar 

03292011, 06:45 PM
Post: #2




Ok firstly u need to understand that there are 2 types of PBP
1. Simple 2. Discounted In discounted PBP we calculate the PV of each cash flow and than use these figures to calculate PBP. YEAR 1 15000 when discounted at 5% for 1 year is 14285.7 YEAR 2 12000 when discounted at 5% for 2 years is 10884.35 YEAR 3 8000 when discounted at 5% for 3 years is 6910.7 YEAR 4 34000 when discounted at 5% for 4 years is 27971.8 YEAR 5 55000 when discounted at 5% for 5 years is 43093.9 Now when we calculate PBP than 75000  14285.7  10884.35  6910.7  27971.8 = 14947.45 14947.45/43093.9 * 12 = 4.16 in other words intial investment will be recovered in 4 years and 4 months under discounted PBP 

« Next Oldest  Next Newest »

User(s) browsing this thread: 1 Guest(s)