Capital Budget Query !

Good Student
Posts: 14
Joined: Wed Aug 29, 2012 5:39 pm

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?


User avatar
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

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 :)

Return to “CFA Level I”



Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.