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Elective Advanced Cost and Management Accounting

Advanced Cost and Management AccountingTU Board 2081

A company is considering buying a new machine with an initial cost of Rs. 50,000 having expected life of 5 years. Net cash flow after tax (CFAT) during the expected life of the machinery is given…

2

A company is considering buying a new machine with an initial cost of Rs. 50,000 having expected life of 5 years. Net cash flow after tax (CFAT) during the expected life of the machinery is given below.

Years 1 2 3 4 5
CFAT 15,000 18,000 16,000 14,000 16,000
Required: Payback period

Answer

· Based on the official syllabus and past papers
Updated

The payback period is the time taken to recover the initial investment from the net cash flows. Here’s the calculation:

Year CFAT (Rs.) Cumulative CFAT (Rs.)
1 15,000 15,000
2 18,000 33,000
3 16,000 49,000

The initial investment of Rs. 50,000 is recovered between Year 2 and Year 3 because:

  • Cumulative CFAT at Year 2 = Rs. 33,000 (still short by Rs. 17,000).
  • CFAT in Year 3 = Rs. 16,000, which covers the remaining Rs. 17,000.

Fractional recovery in Year 3 = years.

Payback period = 2 + 1.0625 = 3.0625 years (or 3 years and 2 months).

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