Sunday, March 1, 2015

Payback period

One of the simplest method is to calculate the period within which the cost of project will be completely recovered. It is the period within which the total cash inflow from the project equal the cost of project. Cash inflow means profit after tax but, before depreciation.

Suppose a project costs Rs 40,00,000 and yields annually a profit of Rs 6,00,000 after depreciation @ 12.5% (SLM) but before tax 50%. The 1st step would be to calculate the cash inflow from this project. The cash inflow, is Rs. 8,00,000 calculated as follows:

Profit before tax                                                          6,00,000
Less:- Income Tax @50%                                           3,00,000
Profit after tax                                                            3,00,000
Add: Depreciation written off                                      5,00,000

The pay back period in this matter is 5 years, ie., =     40,00,000

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