Page 251 - Microsoft Word - 00 ACCA F2 Prelims.docx

Capital budgeting

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

If an investment costs $1m and expects to generate cash flows of
$300,000 per annum, the payback period would be:

1,000,000
Payback period = ————— = 3.33 years or 3 years 4 months
300,000

Illustrations and further practice

Now try TYU questions 7 and 8 from Chapter 14

245