Question

The Saldanha Bay Municipality in partnership with the Military Academy has opened a business centre. As part of this initiative, the students from the Military Academy are utilised in helping businesses with decision-making. You are requested to work out the following independent scenarios and give feedback to the business owners.

The following information applies to questions 2.1 to 2.3:

Each of the following scenarios is independent. Assume that all cash flows are after-tax cash flows.
a. Colby Hepworth has just invested R4 000 000 in a book and video store. She expects to receive a cash income of R1 200 000 per year from the investment.

b. Kylie Sorensen has just invested R14 000 000 in a new biomedical technology. She expects to receive the following cash flows over the next 5 years: R3 500 000; R4 900 000; R7 000 000; R4 200 000 and R2 800 000.

c. Carsen Nabors invested in a project that has a payback period of 4 years. The project brings in R9 600 000 per year.

d. Rahn Booth invested R13 000 000 in a project that pays him an even amount per year for 5 years. The payback period is 2½ years.

Required:

2.1 Calculate the payback period for both Colby and Kylie. (4)

2.2 How much did Carsen invest in the project? (1)

2.3 How much cash does Rahn receive each year?

Answer 1

payback period is the time period within which initialy invested amount is received back in the form of cash inflows.

colby have even cash flow each year in that case

payback period = Initial investment/ cash flow per year

=R4,000,000/200,000

=20 years..................colby

inv=R14,000,000

year	Kylie cash flow	Cumulative cash flow
1	3,500,000	3,500,000
2	4,900,000	8,400,000[3,500,000+4,900,000]
3	7,000,000	15,400,000
5	4,200,000	19,600,000
6	2,800,0003

pay back period = year before full recovery + [unrecovered amount/cash flow next year]

=2+ [14,000,000-8,400,000]/7000,000

=2.8 years

2.2]payback period = Initial investment/ cash flow each year

4 =initial investment /9,600,000

Initial investment = 4*9,600,000

=38,400,000

2.3]payback period = Initial investment/ cash flow each year

cash rflow each year = initial investment /paybakc period

13,000,000/2.5

=R5,200,000