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Sir please assist me in understanding this question. I managed to get the payback period for X but the Discounted Payback period for Y was incorrect. According to the markers answer, They removed the scrap value from the cash flow in yr 5 on project Y only. Why is that ?
HTO Plc is evaluating two possible investment projects and uses a discount rate of 10%
(Yr-0 is the investment cost, the rest are incremental cashflows)YR X Y
0 (400) (450)
1 100 130
2 120 130
3 140 130
4 120 130
5 100 150Year 5 cash flows include $20,000 residual value for each investment project.
The payback period of investment X and the discounted payback period of investment Y are?They should not have removed the 20,000 from the cash flows of either project.
If it is a past exam question or a question in the BPP Revision Kit, then tell me which question and then I will be able to explain what they have done.
It is a Revision kit by LSBF. I also think it may be an error, sir. There was another question where instead of giving the companies cash flows they had given the profits. In this case, they had removed the depreciation from the cashflows before calculating the payback period. Would that be correct?
It seems as though maybe it is an error.
If you are given the profits then you need to add the depreciation to get the cash flows (because depreciation will have been charged in arriving at the profits but is not a cash flow).
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