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Payback period and depreciation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Payback period and depreciation

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • December 3, 2015 at 8:53 am #287175
    artfaith
    Member
    • Topics: 4
    • Replies: 9
    • ☆

    Good morning Mr Moffat, I need your help on the effect of depreciation on payback period investment appraisal.

    During my revision with BPP revision kit I came across a question that calculated the depreciation as a cash flow for computing the cummulative cash flow for the payback period, I am not comfortable with this approach because I don’t think depreciation is a cash flow and should not be a determinant factor in calculating how fast a project’s initial investment is gotten back.

    I await your feedback

    Thank you

    December 3, 2015 at 9:04 am #287183
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    Depreciation is certainly not a cash flow, and it is cash flows we are interested in for the payback period.

    Are you sure you have checked the answer properly? What may have happened is that the question gave profits (instead of cash flows) and so since profits are after charging depreciation it is then necessary to add back the depreciation to arrive at the cash flows.

    If you tell me the number of the question (assuming it is in the current edition of the revision kit) then I will check myself also.

    December 3, 2015 at 5:59 pm #287348
    artfaith
    Member
    • Topics: 4
    • Replies: 9
    • ☆

    Ok now I see where I misunderstood the question, the payback period was only used to derive the cash flow P.A before deducting the depreciation P.A to compute the average investment.

    Thank you Sir

    December 4, 2015 at 7:40 am #287411
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51551
    • ☆☆☆☆☆

    I am pleased you have sorted it out 🙂

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