Payback

Question 1

What does investment mean?

Answer 1

Expenditure to generate future returns.

Question 2

What does capital investment mean?

Answer 2

Spending on non-current assets such as equipment or vehicles.

Question 3

What does investment appraisal mean?

Answer 3

Using numerical techniques to decide which investment should be made.

Question 4

Net cash flow for each year =

Answer 4

Cash in - Cash out

Question 5

What does payback mean?

Answer 5

It means estimating how long it will take for the net cash flows to reach the initial cost of an investment.

Question 6

What is a criterion level?

Answer 6

It is a target set by the business that must be met for an investment to be acceptable.

Question 7

Payback period =

Answer 7

Annual net cash flow

Question 8

Benefits of payback

Answer 8

Easy to understand
Easy to calculate
Likely to be more accurate than Net present value

Question 9

Limitations of payback

Answer 9

Ignores profitability of investment
Ignores how long asset is expected to last
Ignores timing of cash flows
Predicted cash flows may be inaccurate