Page 30 - FM Integrated WorkBook STUDENT 2018-19

Chapter 2

Payback

3.1 Payback technique

The payback technique considers the time a project will take to pay back the money
invested in it. It is based on expected cash flows. To use the payback technique a
company must set a target payback period.

Decision criteria

 Compare the payback period to the company's target return time
and if the payback for the project is quicker the project should be
accepted.

 Faced with mutually exclusive projects choose the project with
the quickest payback.

Question 4

Payback

An expenditure of $2 million is expected to generate net cash inflows of
$600,000 each year for the next seven years.

What is the payback period?

$2,000,000/600,000 = 3.33 years.

Or 3 years + 0.33*12 months

3 years and 4 months.

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