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%.”

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

pinkp@nther says

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%.”

John Moffat says

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.

pinkp@nther says

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.

meghaq8 says

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 ?

meghaq8 says

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

meghaq8 says

yea that’s right, it was pretty basic, sorry if I wasted your time

John Moffat says

No problem – that is correct 🙂

rahmatbakhshi says

Thank you sir, it was helpful.

blast1817 says

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..

John Moffat says

The inflow in the 4th year is 50,000, not 20,000.

Have you downloaded the free lecture notes in which the question appears?

blast1817 says

Yes I did. I found that I was confused the number in the answer notes. Haha thank you!