A project has a spend of £100,000 immediately. It will have net cash income of £37,000 each year for 5 years. What is its payback period? Round up to the nearest month.

The payback period is the time it takes for an investment to generate cash flows sufficient to recover the initial investment. To calculate the payback period, we follow these steps:

1. **Initial Investment**: £100,000
2. **Annual Net Cash Income**: £37,000
3. **Number of Years**: 5 years

Now, let's calculate how many years it will take to recover the initial investment.

\[
\text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Net Cash Income}}
\]

\[
\text{Payback Period} = \frac{£100,000}{£37,000} \approx 2.70 \text{ years}
\]

This means that the project will recover the initial investment in approximately 2.70 years.

### Converting Years to Years and Months:
- The 0.70 years needs to be converted to months:
  
\[
0.70 \times 12 \text{ months/year} = 8.4 \text{ months}
\]

Rounding up to the nearest month gives us 9 months.

### Final Answer:
The payback period is **2 years and 9 months**.

Would you like further details or have any questions on this calculation?

Here are some related questions:
1. How does the payback period impact investment decisions?
2. What are the limitations of using the payback period as a financial metric?
3. How does the payback period compare with other investment appraisal techniques like NPV or IRR?
4. What factors could influence the accuracy of the payback period?
5. How might changes in annual cash inflows affect the payback period?

**Tip:** The payback period does not account for the time value of money, so it might be useful to consider discounted cash flow methods for a more comprehensive analysis.

Learn how to calculate the payback period for a project with an initial investment of £100,000 and annual net cash income of £37,000 over 5 years. Understand the concept and formula used in finance for investment analysis.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation