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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
A project requires an initial investment of $1,000,000 and then earns net cash
inflows of $150,000 per year for 7 years.
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