ABC Co LTD is considering investing in project X that requires K investment of Ugx 10millon. The management of the company has estimated that the project will generate the following cash flows are an economic period of 5 years. YEAR ESTIMATED CASH FLOWS 1 3,000,000 2 4,000,000 3 3,000,000 4 5,000,000 5 2,500,000 Required: Evaluate the project using the PBP method

To evaluate the project using the Payback Period (PBP) method, we need to determine how long it will take for the cash inflows to recover the initial investment of Ugx 10 million. 

### Cash Flows Breakdown

1. **Initial Investment**: Ugx 10,000,000
2. **Estimated Cash Flows**:
   - Year 1: Ugx 3,000,000
   - Year 2: Ugx 4,000,000
   - Year 3: Ugx 3,000,000
   - Year 4: Ugx 5,000,000
   - Year 5: Ugx 2,500,000

### Cumulative Cash Flow Calculation

Let's calculate the cumulative cash flow for each year:

- **Year 1**: Ugx 3,000,000
  - Cumulative: 3,000,000
- **Year 2**: Ugx 4,000,000
  - Cumulative: 3,000,000 + 4,000,000 = 7,000,000
- **Year 3**: Ugx 3,000,000
  - Cumulative: 7,000,000 + 3,000,000 = 10,000,000
- **Year 4**: Ugx 5,000,000
  - Cumulative: 10,000,000 + 5,000,000 = 15,000,000
- **Year 5**: Ugx 2,500,000
  - Cumulative: 15,000,000 + 2,500,000 = 17,500,000

### Payback Period Calculation

The project pays back the initial investment of Ugx 10 million at the end of Year 3. To find the exact payback period, we can look into how much of the cash flow in Year 3 is needed to cover the remaining balance after Year 2:

- **Remaining Amount After Year 2**: Ugx 10,000,000 - Ugx 7,000,000 = Ugx 3,000,000
- **Cash Flow in Year 3**: Ugx 3,000,000

Since the entire cash flow in Year 3 is exactly what is needed to recover the investment, the payback occurs at the end of Year 3.

### Conclusion

The **Payback Period (PBP)** for Project X is **3 years**. 

Would you like more details or have any questions? Here are some follow-up questions:

1. What are the limitations of using the Payback Period method for investment evaluation?
2. Would you like to calculate the Net Present Value (NPV) for the project?
3. How does the Payback Period compare to other investment appraisal methods like IRR or NPV?
4. What factors could affect the actual cash flows from this project?
5. Would you like to see a graphical representation of cash flows over the years?

**Tip:** Always consider the time value of money when evaluating investments, as the Payback Period does not account for the timing of cash flows.

ABC Co LTD is considering investing in project X that requires K investment of Ugx 10 million. The management of the company has estimated that the project will generate the following cash flows over an economic period of 5 years. YEAR ESTIMATED CASH FLOWS 1 3,000,000 2 4,000,000 3 3,000,000 4 5,000,000 5 2,500,000. Required: Evaluate the project using the PBP method.

Learn how to evaluate ABC Co LTD's investment in Project X using the Payback Period (PBP) method. This detailed solution walks through cash flow analysis and cumulative calculations to determine the exact payback period for the investment, requiring an initial outlay of Ugx 10 million and generating specified cash flows over 5 years.

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