25.5.A.1. Payback Period (PBP)

Try these first

1. 1.

   Define Payback Period.

   Hint

   Think about cash flow recovery time.

2. 2.

   What is the formula for calculating PBP?

   Hint

   Remember what you divide by what.

3. 3.

   What is the main focus of the Payback Period?

   • To determine profitability
   • To find cash inflows post-investment
   • To calculate recovery time of investment

   Hint

   Focus on recovery terms.

4. 4.

   True or False: The Payback Period considers all cash flows over the life of the project.

   • True
   • False

   Hint

   Recall the limitations of PBP.

5. 5.

   A company is considering a project with an initial investment of $50,000. The cash inflow for the first four years is expected to be$10,000 each year, and in the fifth year, the cash inflow will rise to $30,000. Calculate the PBP.

   Hint

   Add cash inflows year by year to see the point of recovery.

6. 6.

   Analyze a project that has a PBP of 2 years but provides very low profitability in subsequent years. Discuss the implications for the stakeholders.

   Hint

   Consider the long-term vs. short-term benefits.