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I would appreciate if you can help me with MCQ 86 BPP revision kit
NW Co is considering investing $46,000 in a new delivery lorry that will last for four years, after which time it will be sold for $7,000. Depreciation is charged on a straight-line basis. Forecast operating profits/(losses) to be generated by the machine are as follows.
Year $
1 16500
2 23500
3 13500
4 (1500)Question : Assuming operational cash flows arise evenly over the year, what is the payback period for this investment (to the nearest month)?
A) 1 year 7 months
B) 2 years 7 months
C) 1 year 5 months
D) 3 years 2 monthsAs per my knowledge and what i learned from your lectures the answer would have been:-
2 years + 6000/13500 = 2.44 (Approx. option B)
but according to kit answer it is:-
option A
they added depreciation in operating profits and that is how they get this answer
why did they add depreciation ?In future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
The question has given the accounting profits, and profits are always after charging depreciation.
For the payback period we need the cash flows and since depreciation is not a cash flow, we need to add back the depreciation in order to find out what the profit would be before charging depreciation.
I do explain this in the lectures (and in the F2 lectures also, because this is revision of F2).
My apologies sir for posting this question in this forum.
I will take care about that in future.
Thank you for clearing my concept 🙂
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