Name

JULFIKAR ALI  AJAY YADAV  ALI WARASI  NAVED KHAN  VASI-UZ-ZAMA VASI-UZ ARUN JAMES


Roll no
13 14 15 16 17 18

1. 2. 3.

Payback Period (PBP)

Average Rate of Return (ARR)
Discounted Pay Back Period (DPBP)

` `

It is one of derivative of cash flows. It is a simple technique and does not employ the discounted cash flows techniques.

It measures the time within which the initial investment of the project can be recovered based on the cash accruals generated by the project.

1. PBP= 2. PBP=
` ` `

B x 12 Months N+ C

N= No. of years before final recovery C= Cash flow during the year B= Balance amount still to be recovered

1. 2. 3.

Simple method and short calculation. Method can be employed by layman. Indicate the period within which the initial investment would be recovered. Lower the payback period more attractive would be the project.

1) 2)

It fails to consider the time value of money. It ignored cash flow beyond the payback period. This is lead to discrimination against projects, which generate substantial cash flows in the later years.

3) 4)

It may divert attention from profitability. It does not indicate the liquidity position of the firm as whole, which is more important.

Open Restaurant
Open Restaurant

Business!

Initial Investment = 170,000

Mr. Kaliya Mr. Bheem

Cash Inflow

Cash Inflow

40,000 50,000 60,000 50,000

40,000 60,000 60,000 40,000

But

Only 1 will get selected

Whose business plan will get accepted? Solution= PBP Method!

Mr. Kaliya s PBP for 3years= 150,000 4th year s cash inflow C= 50,000 B= 0,000 (170,000- 150,000) PBP= =3years, 4.8 months

Mr. Bheems PBP for 3years= 160,000 4th years cash inflow C= 40,000 B= 10,000 (170,000- 160,000)

PBP= =3years, 3 months

Bheems Business Plan gets accepted!

3years, 3 months =
Lastly Bheem hit Kaliya and open the Restaurant!

=3years, 4. months

` ` `

It attempts to measure the rate of return on investment. Project expected to give return below this rate are rejected, otherwise accepted. In case of several alternative investment proposals, project with higher ARR would be preferred to those having lower ARR i.e.
1. The original cost of investment 2. Average investment

Initial cost of asset ` Estimated life ` Scrap value (at the end of 4 years) ` Depreciation
`

:Rs. 1,00,000 : 4 years :Rs. 20,000 : Straight Line Method

Average investment =

1,00,000 20,000 + 20,000 2

= Rs. 60,000

1) 2) 3)

It is easy to understand and simple to calculate. It does not discount the future cash inflows. This method does not differentiate the alternative investment proposals in terms of their magnitude of investments.

In this method the net present values are added cumulatively from the start of the project until the sum become positive.

DPBP is defined as the time as the invested capital has been returned together with the interest cost of associated fund.

Here the rate of discount used to arrive at the present value of the net cash flows is the cost of capital.

Advantages:Advantages:1. 2. 3.

This method takes into consideration the time value of money by combining PBP with discounted cash flows. It consider requirement to make some return on investment. It helps in the judgment of project risks.

Limitations:Limitations:`

This method is not useful for assessing profitability of the whole project.

Cost of project : Rs. 10,000 Life :5 years Cost of Capital :10% Year New cash flows (Rs) 0 1 2 3 4 5 (10,000) 4,000 3,000 4,000 2,000 4,000 PV Factor at 10% 1.000 0.909 0.826 0.751 0.683 0.621 PV of Net Cash flows (Rs.) (10,000) 3,636 2,478 3,004 1,366 2,484 Communicativ e NPV (Rs.) (10,000) (6,364) (3,886) (882) 484 2,968

The DPBP lies between 3rd & 4th years. By interpolation the pay back period is

882 3 + 1,366 = 3.65 years

( )

Financial Management
(By ARVIND DHOND)