4. Payback Period Method

Try these first

1. 1.

   Calculate the depreciation for a machine with a purchase price of 20 lakh at a 40% rate.

   Hint

   Use the formula: Depreciation = Purchase Price x Depreciation Rate.

2. 2.

   What is book value at the end of the first year if the initial cost is 30 lakh and depreciation is 12 lakh?

   Hint

   Subtract depreciation from initial cost.

3. 3.

   What does the Payback Period Method measure?

   • Cost of depreciation
   • Time to recover investment
   • Annual profit

   Hint

   Think about what aspect of the investment the term 'payback' refers to.

4. 4.

   True or False: The economic life of a machine is when operating costs start to decrease.

   • True
   • False

   Hint

   Consider the context of machine replacement.

5. 5.

   If a machine costs 40 lakh and has operating costs increasing each year while the projected profits increase less than the costs, determine the payback period considering both aspects.

   Hint

   Keep track of both costs and revenues year by year.

6. 6.

   Using specific values, compare two machines where one has a shorter payback period but lower economic life, and the other a longer payback but higher profits over time. Which should be chosen?

   Hint

   Factor in the company's financial goals and cash flow situation.