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BPP Exam kit Question 98 – Payback period

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › BPP Exam kit Question 98 – Payback period

  • This topic has 1 reply, 2 voices, and was last updated 2 months ago by John Moffat.
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  • November 26, 2022 at 4:20 pm #672648
    Anonymous
    Inactive
    • Topics: 2
    • Replies: 1
    • ☆

    A project has average estimated cash flows of $3000 per year with an initial investment of $9000.

    Depreciation is straight-line with no residual value and the project has a 5 year life span. The company has a target ROCE of 15% and a target payback period of 2.5 years. ROCE is based on initial investment.

    Under which investment appraisal methods, using the company’s targets, will the project be accepted? 1. ROCE 2. Payback basis

    My question: In the BPP answer section, ROCE was calculated after adjusting depreciation. But for calculating Payback period it just used $3,000 without adjusting depreciation ie. 9000/3000. May i know why amount after adjusting depreciation was not used for Payback calculation.

    Thanks Sir!

    November 27, 2022 at 9:17 am #672728
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    We use the cash flows for calculating the payback period, and depreciation is not a cash flow.

    Have you watched my free lectures on this? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.

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