Business – 10.3 Investment appraisal – Payback and ARR | e-Consult
10.3 Investment appraisal – Payback and ARR (1 questions)
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First calculate cumulative cash inflows:
| Year | Cumulative Inflow (£) |
| 1 | 30,000 |
| 2 | 75,000 (30,000+45,000) |
| 3 | 130,000 (75,000+55,000) |
The initial outlay of £120,000 is recovered during Year 3. At the end of Year 2 the cumulative inflow is £75,000, leaving £45,000 to be recovered in Year 3.
Fraction of Year 3 required:
£45,000 ÷ £55,000 = 0.8182 of a year ≈ 0.8182 × 12 months ≈ 9.8 months.
Payback period = 2 years + 9.8 months ≈ 2 years 10 months.
Since 2 years 10 months is less than the 3‑year criterion, the project would be accepted on a payback basis.