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Quick question if you please ?
at the mock exam section B1 when calculating the the NPV and Payback period, we didn’t add back the 56000 amount of depreciation each year back to the 90000 inflows, however in a question like like the following one we consider it and added back, i am confused with that point, could you please clear it ?..
A company is considering an investment of $400000 in new machinery. The machinery is expected to yield incremental profits over the next five years as follows:
Year Profits($)
1 175000
2 225000
3 340000
4 165000
5 125000Thereafter, no incremental profits are expected and the machinery will be sold. It is company policy to depreciate machinery on a straight line basis over the life of the asset. The machinery is expected to have a value of $50000 at the end of year 5.
Calculate the payback period of the investment in this machinery to the nearest 0.1 years.
In the mock exam you were given the cash flows (not the profit).
In the question you have typed above, you are given the profits and therefore you need to add back the depreciation to get the cash flows.
profit depreciation cash flow cumulative
175000 (70000) 105000 105000
225000 (70000) 155000 260000
340000 (70000) 270000 530000
165000 (70000) 95000
125000 (70000) 55000
….. ………… 50000(scrap value)(530000-400000)/270000=0.48
the pay back period =2+0.48=2.48 years
Dear John Sir,
Am I right?No – profit is after charging depreciation.
So to get the cash flow, you need to add back the depreciation.So in year 1, the profit is 175,000; the depreciation is 70,000; so the cash flow is 245,000.
What you are doing otherwise is the correct approach.
Mr.Moffat . based on ur experience.. i had the F3 exam today i just made a very stupid mistake .. at section B he asked about making the Consolidated sofp and i made it however it was imbalanced with the amount of goodwill i forget to add it, however i calculated it in the other page, does that mean that i will lose the hole 15 Mark ??
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