Investment appraisal – Payback period – ACCA Management Accounting (MA)
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Hope you are well Mr. Moffat, thank you. I passed FA and MA today on second attempt. This time I focused really on your videos. Keep going strong and healthy sir.
That is great news. Many congratulations 🙂 🙂
Mr Moffat, would all three methods (the NPV, IRR and discounted payback period) explained in this lecture be used for decision making? You explained the problems with each method when used alone when carrying out an investment appraisal so I just wondered.
In practice companies will use several approaches and then form an overall judgement.
Hello sir please can you tell me how to deal with incremental cost
Incremental costs means extra costs. So when appraising a project we are looking at the extra costs involved in doing the project.
Dear John,
How would we account for Payback/Discounted Payback Period if there was A Scrap value?
If given the scrap value at the end of each year, then you would have to do the exercise for each possible number of years ownership until you found the first one that paid for itself. This is very unlikely in the exam – usually you would be only given the one scrap value at the end of its life, in which case you would do it exactly as usual.
Acknowledged,
Thank You!
Recently, sat my exam without looking at chapter 20-25. predictable I failed with 42%. looking forward to retake after watching these fantastic lectures. Very grateful to have these available.
Regards Paul
What about the cost of capital 10%?
Or does it mean it’s part of the cost of new project which is 100,000$
The cost of capital is irrelevant for the payback period.
Hello, I need to calculate the payback period for the below problem, and therefore require the annual net cashflows – how do I go about calculating this? Should I add depreciation back to profits or should I subtract operating costs from revenue, will that mean the cashflow per year will be the same???
“considering the purchase of a machine. The machine will cost R2,000,000 and is expected to have a useful life of 5 years, with no salvage value. The machine is expected to increase revenues by R840,000 per year but operating costs will increase by R300,000 per year. The average annual profit is estimated at R140 000. The company desires a minimum required rate of return of 12%.”
In future you must ask questions like this in the Ask the Tutor Forum and not as a comment on a lecture.
It does not matter which you do because both result in the same net cash flow.
Dear John, thank you for the clarity – this was my first post on the forum, and am still learning to navigate through it. Thank you for the guidance.
Hi sir ,I have a doubt, it could be a basic rather stupid question maybe,
but could you just explain me when we calculate the extra time required like for example in here 3 years + 10000/50000, here when we calculate 10000/50000 where both are in dollars the answers should also be in money units right which is dollar, how do we get time units by calculating this ?
sir please just verify whether i have thought this is in the right way ,
I have understood that if in a 1 year cash received is $50000, then how many years for receiving $10000, which is (1year *10000/50000) = 0.2 years
yea that’s right, it was pretty basic, sorry if I wasted your time
No problem – that is correct 🙂
Thank you sir, it was helpful.
Eg.3 : Payback period =3+10,000/50,000
Why its not divide by 20,000 which is 4years’ cash inflow?
Can someone help me..
The inflow in the 4th year is 50,000, not 20,000.
Have you downloaded the free lecture notes in which the question appears?
Yes I did. I found that I was confused the number in the answer notes. Haha thank you!