TGV Limited is planning to invest in a new project. The project will last for five years. Depreciation on project assets is provided on the reducing balance basis over the life of the project. Depreciation will be charged at the rate of 40% per annum and the carrying amount of the assets used in the project at the end of 5 years will be £69,984. Net cash inflows from the project in years 1 to 5 are expected to be £215,000, £255,000, £270,000, £240,000 and £200,000. It is anticipated that the project assets will be sold for their carrying amount at the end of year 5. What is the payback period for this project to the nearest month?

Question

Quizplus · Accepted Answer

The payback period is the time it takes for the cumulative cash inflows to equal the initial investment. The cumulative cash inflows are £215,000 in year 1, £470,000 in year 2, £740,000 in year 3, and £980,000 in year 4. The initial investment can be calculated by working backwards from the carrying amount after 5 years using the depreciation rate. The payback period is reached between year 3 and year 4, specifically at 3 years and 8 months.

TGV Limited Is Planning to Invest in a New Project