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Which is right when calculating Payback period for a 5 year project.
1. NPV of from present value of each annual Cash flow OR
2. Annual Cash Flow( Un discounted by discount rate)If asked for the payback period then it just uses the cash flows.
If asked for the discounted payback period then we use the discounted cash flows.
I do explain this in my free lectures.
Thanks Moffat. I found out that the formular “net investment /average annual operating cash flow” gives different values from when calculated manually using cumulative cash flow. Both for the simple cash flow and discounted cash flow.
Of course it will, which is why you should not simply learn formulae. The exam questions are designed to test your understanding as opposed to simply having learned rules.
Your ‘formula’ only works if the cash flows are the same each year (and not if it is the discounted payback period that is required).
Again, I do suggest that you watch my free lectures. 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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