Page 340 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 14

3.2 Constant annual cash flows

In some cases, the cash flows estimated for the project are the same each year. We
call these constant annual cash flows. In these cases, the payback calculation can
be simplified by using the following formula:

Initial investment
Payback period = —————————
Annual cash flow

Test your understanding 3

Calculate the payback period for an investment that costs $1million and
expects to generate cash flows of $300,000 per annum.

Illustrations and further practice

Now try TYU questions 7 and 8 from Chapter 14

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