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Chapter 5
Chapter 5
Lidiya Asfaw
1
Chapter Five
Investment Evaluation
Points to be discussed:-
Introduction;
Total investment costs;
Projects financing;
Financial evaluations
2
Introduction
Payback Period
Return on Investment (ROI)
Payback Period
The pay back period is defined as the length of time required
to recover one’s investment.
The time period is usually expressed in years and months.
=
Net investment
Pay back Period
Net annual income from investment
Decision Rule
• Accept the project only if its payback period is LESS
than the target payback period.
Year 0 1 2 3 4
Machine A
Cash flow (Birr) -35,000 +20,000 +15,000 +10,000 +10,000
Machine B
Cash flow (Birr) -35,000 +10,000 +10,000 +15,000 +20,000
Pay back period for machine A is two years where as for machine
B it is three years.
That is machine A will recover its investment cost one year
sooner than machine B.
Where project’s are ranked by the shortest pay back period,
machine A is selected in preference to machine B.
Exercise: Payback Period (PBP)
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