Investment Appraisal - Payback 3.3 Decision-making techniques

What you need to know a) Simple payback

Concept links Payback Cash flowInvestmentRisk & returnNPVARR

What is Investment Appraisal?

What is the Payback Period?

How to Calculate Payback… Identify the net cash flows for each period (e.g. year) Keep a running total of the cash flows

A Simple Example of Payback A manufacturer of chocolates is planning to invest £500,000 in a new, state-of-the-art chocolate-moulding machine. This will enable the business to increase production capacity and revenues, generating significant extra profit.

The Chocolate Moulding Machine: Investment Numbers YearCash Flow Detail Cash Flow £ Cumulative Cash Flow Payback? 0Investment (cash outflow)(500,000) No 1Net Cash Inflows100,000 2Net Cash Inflows150,000 3Net Cash Inflows175,000 4Net Cash Inflows150,000

Calculating the Precise Payback Period 3 Years + the part of the 4 th Year when Payback was achieved 3 +

Benefits of Using Payback Period…

Drawbacks of Using Payback Period…