Question

determined that the after-tax cash flows for the project will be RM10,000; RM12,000;

RM15,000; RM10,000; RM7,000; RM8,000 and RM9,000, respectively, for each of the

Years 1 through 7. The initial cash outlay will be RM40,000. discount rate 13%

(a)Pay Back Period (3 markah/marks)

(b) Discounted Pay Back Period (3 markah/marks)

Answer 1

Part A:

Payback period is the peiod in which initial investment is recovered.

Year	Opening Bal	Cash Flow	Closing Bal
1	$ 40,000.00	$ 10,000.00	$ 30,000.00
2	$ 30,000.00	$ 12,000.00	$ 18,000.00
3	$ 18,000.00	$ 12,000.00	$    6,000.00
4	$    6,000.00	$ 12,000.00	$   -6,000.00
5	$   -6,000.00	$ 12,000.00	$ -18,000.00
6	$ -18,000.00	$ 12,000.00	$ -30,000.00
7	$ -30,000.00	$ 12,000.00	$ -42,000.00

PBP = Year in which least +ve Clsoing Bal +[ Closing Bal at that year / Next year CF ]

= 3 + [ 6000 / 12000 ]

= 3 + 0.5

= 3.5Years

Part B:

Discounted PBP is similar to PBP. However here Discounted CFs are considered.

Year	Opening Bal	Cash Flow	PVF @13%	Disc CF	Closing Bal
1	$ 40,000.00	$ 10,000.00	0.8850	$   8,849.56	$ 31,150.44
2	$ 31,150.44	$ 12,000.00	0.7831	$   9,397.76	$ 21,752.68
3	$ 21,752.68	$ 12,000.00	0.6931	$   8,316.60	$ 13,436.08
4	$ 13,436.08	$ 12,000.00	0.6133	$   7,359.82	$    6,076.26
5	$    6,076.26	$ 12,000.00	0.5428	$   6,513.12	$      -436.86
6	$      -436.86	$ 12,000.00	0.4803	$   5,763.82	$   -6,200.69
7	$   -6,200.69	$ 12,000.00	0.4251	$   5,100.73	$ -11,301.41

Disc PBP = Year in which least +ve Clsoing Bal +[ Closing Bal at that year / Next year CF ]

= 4 + [ 6076.26 / 6513.12 ]

= 4 + 0.93

= 4.93 Years