Question 4.5: What is the payback period of the Chaotic Industries project...

Financial Management for Decision Makers

What is the payback period of the Chaotic Industries project from Activity 4.2?

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The inflows and outflows are expected to be:

Time		Net cash flows £000	Cumulative net cash flows £000
Immediately	Cost of vans	(150)	(150)
1 year’s time	Saving before depreciation	30	(120) (−150 + 30)
2 year’s time	Saving before depreciation	30	(90) (−120 + 30)
3 year’s time	Saving before depreciation	30	(60) (−90 + 30)
4 year’s time	Saving before depreciation	30	(30) (−60 + 30)
5 year’s time	Saving before depreciation	30	0 (−30 + 30)
6 year’s time	Saving before depreciation	30	30 (0 + 30)
6 year’s time	Disposal proceeds from the vans	30	30 (0 + 30)

The payback period here is five years; that is, it is not until the end of the fifth year that the vans will pay for themselves out of the savings that they are expected to generate.

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