Q9RQ - Horngren'S Financial And Managerial Accounting

Question

How is payback calculated with unequal net cash inflows?

Step-by-Step Solution

Answer

Answer

Payback Period = Initial Investment / Net Cash Flow per period

Step 1: Meaning of Payback Period

The payback period is the time it takes to recover the initial expense. It is the sum of a long time taken to recover the unique consumption of a project. Consequently, the companies can use the payback period to compare projects in capital arrangements and evaluate the time it takes for the initial venture to recover in years.

Step 2: Calculation of payback with unequal net cash inflows

The payback period (in years) of an investment is computed as follows if net cash inflows are unequal:

Before complete recovery, add the cumulative net cash inflows for full years.

$Payback=Number of full year before recovery+\frac{Unrecoved \cos t at the start of year}{Cash flow during the year}$