Capital Budget Query !

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Capital Budget Query !

Postby dee5.v » Fri Sep 14, 2012 11:05 am

Year 0 1 2 3 4
Proj A NCF -2000 1000 800 600 200
Cum NCF -2000 -1000 -200 400 600

Year 0 1 2 3 4
Proj B NCF -2000 200 600 800 1200
Cum NCF -2000 -1800 -1200 -400 800

Payback for A 2+200/600 2.33 yrs

Payback for B 3+400/1200 3.33 yrs

So the numerator is actually the NEGATIVE (-200) for Proj A n (-400) for Proj B RIGHT?? The denominator is the CUMUALTIVE NCF of 600 for Proj A ? So accordingly for Proj B, it shud b 800, why have they given it 1200 ? Or denominator for A should be 200.

Basically, the DENOMINATOR i.e CASH FLOW shud b last year's POSITIVE NCF RIGHT?


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Re: Capital Budget Query !

Postby shreyas » Sat Sep 15, 2012 11:14 am

Basically payback period calculates how many years it takes to recover your cash flows. So if you take example of Project B you are trying to calculate the cumulative net CF of -400 is recovered in the following year that is year 4. So the negative cash flow of $400 is recovered from $1200 net cash flow and then we get the pay back period. hope you have understood this well :)

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