DAIBB, CASHFLOW STATEMENT, PAY BACK PERIOD (PBP), NET PRESENT VALUE (NPV), PROFITABILITY INDEX (PI)

 

 

 

DAIBB, MANGEMENT ACCOUNTING
CASHFLOW STATEMENT, PAY BACK PERIOD (PBP), NET PRESENT VALUE (NPV), PROFITABILITY INDEX (PI)
PAYBACK PERIOD- PAYBACK METHOD The payback period is the time required to earn back the amount invested in an asset from its net cash flows. It is a simple way to evaluate the risk associated with a proposed project. An investment with a shorter payback period is considered to be better, since the investor's initial outlay is at risk for a shorter period of time. The calculation used to derive the payback period is called the payback method. The payback period is expressed in years and fractions of years. For example, if a company invests 300,000 in a new production line, and the production line then produces positive cash flow of $100,000 per year, then the payback period is 3.0 years (300,000 initial investment ÷ 100,000 annual payback).	Cash Flow before TAX (CFBT) YEAR CFBT 1 1,00,000 2 1,50,000 3 2,00,000 4 2,25,000 5 3,00,000     PVF at 15% 1 2 3 4 5 0.870 0.756 0.658 0.572 0.497	PROJECT COST    5,00,000 Estimated Salvage Value (SV)  50,000, in straight line depreciation TAX rate   35%     Required <![if !supportLists]>·          <![endif]>Pay Back Period (PBP) <![if !supportLists]>·          <![endif]>Net Present Value (NPV) <![if !supportLists]>·          <![endif]>Profitability Index (PI)

 

Solution											Notes
1	2	3	4	5	6	7	8	9	10	11	PROJECT COST    5,00,000 Estimated Salvage Value (SV)  50,000, in straight line depreciation = (5,00,000 -50,000)/5 yrs = 90,000     TAX rate   35%   Dep = (5,00,000 – 50,000) / 5 yrs        = 90,000   Required <![if !supportLists]>·     <![endif]>Pay Back Period (PBP) <![if !supportLists]>·     <![endif]>Net Present Value (NPV) <![if !supportLists]>·     <![endif]>Profitability Index (PI)
	Cash Flow Before Tax	Depreciation
		Note- 1	C2 - C3	C4 X 35%	C4 – C5	C3 + C6		at 15%	C7 X C9
Year	CFBT	DEP	EBT	TAX	EAT	NCB	cum NCB	PV	PV of NCB	Cum PV of NCB
1	1,00,000	90,000	10,000	3,500	6,500	96,500	96,500	0.870	83,955	83,955
2	1,50,000	90,000	60,000	21,000	39,000	1,29,000	2,25,500	0.756	97,524	1,81,479
3	2,00,000	90,000	1,10,000	38,500	71,500	1,61,500	3,87,000	0.658	1,06,267	2,87,746
4	2,25,000	90,000	1,35,000	47,250	87,750	1,77,750	5,64,750	0.572	1,01,673	3,89,419
5	3,00,000	90,000	2,10,000	73,500	1,36,500	2,76,500	8,41,250	0.497	1,37,421	5,26,840
SV	50,000
									5,26,840
		req 1	PayBack Period  = 3 + (500000 – 387000) / 177750 = 3 + 0.64 = 3.64 yrs
		req 2	Net Present Value = (526840 – 500000) = 26840
		req 3	Profitability Index = (526840 / 500000) = 1.054