Payback Analysis Mark Fielding-Pritchard mefielding.com1.

Slides:

Advertisements

Similar presentations

+ Investment Appraisal. + What is investment appraisal? Techniques to help managers decide on the best investment from a range of options Investment includes.

Advertisements

Contemporary Engineering Economics, 4 th edition, © 2007 Initial Project Screening Method - Payback Period Lecture No.15 Chapter 5 Contemporary Engineering.

Net Present Value and Other Investment Criteria

3.2 Investment Appraisal Chapter 19. Investment To purchase capital goods  Equipment  Vehicles  New buildings  Improving existing fixed assets.

Capital Investment Analysis ACG 2071 Module 12 Chapter 25 Fall 2007.

© Mcgraw-Hill Companies, 2008 Farm Management Chapter 17 Investment Analysis.

Capital Investment Analysis 28. The Capital Investment Process OBJECTIVE 1: Define capital investment analysis, state the purpose of the minimum rate.

PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a.

11-1 Lecture 8: Capital Budgeting Decisions Chapter 12 in Brewer.

INVESTMENT APPRAISAL.

Chapter 4. Economic Factors in Design The basis of design decisions will be economics. Designing a technically safe and sound system will be only part.

The Student Handbook to T HE A PPRAISAL OF R EAL E STATE 1 Chapter 24 Discounted Cash Flow Analysis and Special Applications in Income Capitalization.

Chapter 17 Investment Analysis

Castellanza, 20 th October and 3 rd November, 2010 FINANCIAL INVESTMENTS ANALYSIS AND EVALUATION. Corporate Finance.

Section II-VI 1. II-34 a.k.a. LeanSigma II-36 4 Based on the time value of money principal – comparing what a dollar is worth today to another time.

CASH FLOW ANALYSIS PROFITABILITY. GENERAL CASH FLOW APPROACH CASH FLOW ANALYSIS PROVIDES A RIGOROUS METHOD TO COMPARE PROFITABILITY USES THE SAME COMPONENTS.

Contemporary Engineering Economics, 4 th edition, © 2007 Initial Project Screening Method - Payback Period Lecture No.15 Chapter 5 Contemporary Engineering.

Corporate Finance Lecture 2. Outline for today The application of DCF in capital budgeting The application of DCF in capital budgeting –Identifying Cash.

Net Income Versus Cash Flow

Reading a Balance Sheet And an Income and Expense Statement And a Cash Flow Analysis Viv Grigg, some txt from Ankush85.

ACCOUNTING CONCEPTS. BASIC CASH FLOW MODEL  REVENUES = PRICE * VOLUME = R  SALVAGE = VALUE OF CAPITAL AT THE END OF THE PROJECT LIFE = S  PROFIT =

Accounts Interpreting Accounts. Key Accounting Documents Public Limited Companies in the UK are required to publish their accounts This will usually consist.

AEC 422 Fall 2014 Unit 2 Financial Decision Making.

Managerial Finance Net Present Value (NPV) Week 5.

The Student Handbook to T HE A PPRAISAL OF R EAL E STATE 1 Chapter 24 Discounted Cash Flow Analysis and Special Applications in Income Capitalization.

Principles of Managerial Accounting Chapter 14. Time Value of Money A dollar today is worth more than a dollar received in the future.

INVESTMENT APPRAISAL TOPIC 4.3.2a. Investment appraisal is the process of making decisions about possible future investment projects using quantitative.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction ► This slide deck provides a suggested framework for the financial evaluation of an investment project. When evaluating any such project,

Objectives 1. Explain what is meant by term ‘Capital Investment’ and how a business decides which project to invest in 2. State the two main methods that.

Investment appraisal The basics Philip Allan Publishers © 2015.

Return on Investment – Net Present Value Method By R. S. Miolla.

Capital Budgeting Net Present Value (NPV)

Good judgment comes from experience, and experience comes from bad judgment. I like this quote 1.Strongly Agree 2.Agree 3.Neutral 4.Disagree 5.Strongly.

ACCTG101 Revision MODULES 10 & 11 TIME VALUE OF MONEY & CAPITAL INVESTMENT.

ECEN Winter 2015 Product Development Economics.

Technical and economic indicators of industrial productivity expansion. Student: Hotovets D. Scientific supervisor: Zborovska E. Language consultant: Lypska.

Financial Statements Q&A. Name a type of Financial Statement?

IB Business and Management

4.05 Implement Accounting Procedures To Track Money Flow And To Determine Financial Status. Describe the nature of income statements.

The Capital Budgeting Decision Chapter 12. Chapter 12 - Outline What is Capital Budgeting? 3 Methods of Evaluating Investment Proposals Payback IRR NPV.

Contemporary Engineering Economics, 4 th edition, © 2007 Initial Project Screening Method - Payback Period Lecture No.15 Chapter 5 Contemporary Engineering.

1 Tutorial: Financial Feasibility ITEC 2010 “Systems Analysis and Design, I” [Prof. Peter Khaiter]

Road to Retirement Course. Introduction to Investing “When you’re making money doing what you love, you are already retired.” “Many describe the new retirement.

Chapter 14 Capital Budgeting Cost Accounting Foundations and Evolutions Kinney, Prather, Raiborn.

Financial Statements, Taxes and Cash Flow1 Financial Statements, Taxes and Cash Flows Financial Statements  Assets Building $190,000 Accumulated Depreciation.

Chapter 8 Long-Term (Capital Investment) Decisions.

Warren Reeve Duchac Accounting 26e Capital Investment Analysis 26 C H A P T E R human/iStock/360/Getty Images.

Chapter 15 Capital Budgeting Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage.

AGEC 407 Investment Analysis Time value of money –$1 received today is worth more than $1 received in the future Why? –Earning potential –Risk –Inflation.

Financial management: lecture 7 Free Cash Flows in Finance Calculate future cash flows.

Copyright © 2005 by South-Western, a division of Thomson Learning, Inc. All rights reserved. 1-1 Understanding Accounting and Financial Statements.

Time Value of Money Increases in value over time/inflation Increases in value over time/inflation Interest (principle * rate * time) Interest (principle.

Finance Chapter 2 Financial statements. Financial statements & reports  Annual report—a report issued once a year by a corporation to its stockholders,

Live as if you were to die tomorrow & Learn as if you were to live for ever.

9- 1 Fundamentals of Corporate Finance Chapter 9 Using Discounted Cash Flow Analysis to Make Investment Decisions TOPICS COVERED Identifying Cash Flows.

Understanding the Economics of One Unit  One way to analyze profitability is to look at how much profit the business makes every time a customer buys.

Accounts. Key Accounting Documents Public Limited Companies in the UK are required to publish their accounts This will usually consist of three key accounting.

Part III – Developing the Entrepreneurial Plan Chapter 7 – Environmental Assessment: Preparation for a New Venture Chapter 8 – Marketing Research for New.

A21 Business Studies (Investment Appraisal)

Net Present Value and Other Investment Criteria

General Money Management

Net Present Value and Other Investment Criteria

Investment Appraisal – Discounted Cash Flow (NPV)

Basics of financial management Chapter 5

Investment Decision Under Certainty

Investment Decision Under Certainty

Long-Term (Capital Investment) Decisions

What I Focus On is What I Get!

Accounting Help for Assignment

Presentation transcript:

Payback Analysis Mark Fielding-Pritchard mefielding.com1

Payback  How long before I get my money back?  Which investment is financially better? mefielding.com2

What It Tells Us mefielding.com3 The Payback Period tells the length of time (Weeks, months or years) before an investment reaches breakeven and begins to return a profit.

The Calculation mefielding.com4 This calculation must take into account Incomes, Expenses and Taxes: – The shorter the payback period, the better; – The longer the payback period, the longer funds are locked up and the riskier the project probably is. Note: Depreciation should not be included in the calculation.

The Calculation Year:01234 Total Increase in Sales/Revenues 5001,0001,400 1,800 Total Increase in Costs/Expenses Increase/(Decr.) in Profit Before Tax ,260 Corporate Tax (30%) Minus: Investment -800 Net Cash Flow for the Year Cumulative Net Cash Flow ,468 Payback Period =2.1 years mefielding.com5 In this example: Payback Period = /686 = 2.1 years Cumulated Net Cash Flow end of Year 4 = $1,468

Limitations mefielding.com6 One limitation to the Payback Period is that it does not consider the time value of money: One $ today is worth more than one $ tomorrow (Or the other way around: One $ tomorrow is worth less than one $ today). The way to remove this limitation is by calculating the Discounted Payback Period. It is the same calculation, but taking into consideration the time value of one dollar.

Discounting mefielding.com7 Applying a discount factor for cost of funding = 10%: Discounted Payback Period = /515 = 2.4 years Cumulated Discounted Net Cash Flow end of Year 4 = $914

Discounting the Cashflow Year:01234 Total Increase in Sales/Revenues 5001,0001,400 1,800 Total Increase in Costs/Expenses Increase/(Decr.) in Profit Before Tax ,260 Corporate Tax (30%) Minus: Investment -800 Net Cash Flow for the Year Cumulative Net Cash Flow ,468 Payback Period = 2.1years Discount Factor (at Cost of Funding = 10%) Discounted Net Cash Flow for the Year Cumulative Discounted Net Cash Flow Discounted Payback Period = 2.4years mefielding.com8