Question

Suppose your friend Shamiul works in a textile company and recently they are going to buy a new machine for the plant. He is calculating the acceptability of the project. The targeted payback period for the project is 2.5 years. Expected net costs are listed in the following table:

 

Calculate the payback period (with timeline) of the project and decide whether he should invest in this project or not. 

Answer 1

Initial cash flow to be recovered =Tk185,000

Year	Cash flow	cumulative cash flow
1	27550	27550
2	57320	27550+57320=>84,870
3	47750	84870+47750=>132,620
4	67340	132620+67340=>199,960
5	6980	199960+6980=>206,940

 

It can be seen that the initial investment of Tk185,000 is recovered between year 3 and 4.

 

The payback period will be = year 3 + (initial investment - cumulative cash flow of year 3) / cash flow of year 4

=> 3 years + (185,000-132,620) / 67340

=>3.77 years.

 

Since the payback period is longer than target payback period of 2.5 years, company need not invest in this project.

Since the payback period is longer than target payback period of 2.5 years, company need not invest in this project.