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Payback calculations

Initial research for Brook Bicycles's Columbus project has identified three possible locations for a new retail outlet. Click here to download a PDF of the background to the project and the basic financial data relating to the three locations.

 

The Cascades

The table below takes the financial data for the Cascades development and calculates the net cash flow for each year and the cummulative cash flow over five years. All figures are in thousands.

A B C D E
Year Income Expenditure Net cash flow (B-C) Cumulative cash flow (E from previous year + D)
0 0 595 -595 -595
1 900 500 400 -195
2 954 544 410 215
3 1,011 575 436 651
4 1,071 600 471 1,122
5 1,136 650 486 1,608

 

If these figures are plotted on a graph it is clear that the payback occurs after about 18 months. To be precise, the payback is:

Payback period = 1 + (195/410) or 1.48 years (a week short of 18 months)

 

 

This approach only plots the net cash flow unlike the examples in the encyclopaedia example which plot both income and expenditure.

 

Activity

Click on the image opposite to download a PDF that you can use to insert the figures for the Village Quarter development and calculate the net cummulative cash flow.

There is also a blank graph where you can plot your results.

Then click on the image opposite to download a model answer.

 

What next?

Net present value

This activity takes the appraisal one step further by discounting future costs and revenues to calculate a present value.

 

 

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Payback calculations

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