Accounting Based Exam: Payback Period Calculation, Evaluation and Investment Appraisal Decisions

Accounting Based Exam

Multiple choice question
Question
no Answer
1 a
2 d
3 a
4 b
5 a
6 d
7 b
8 d
9 d
10 b
11 b
12 a & b
13 d
14 b
15 a
16 d
17 d
18 d
19 b
20 c
21 b
22 b
23 c
24 a
25 d
26 d
27 a
28 c
29 c
30 d

a. Computing payback period for both Edinburgh and Newcastle
Initial investment
Edinburgh Newcastle
Franchise fee (year 0) 8700 7950
New buses (year 0 4120 3890
Total initial
investment 12820 11840
Payback period
Edinburgh Newcastle
Year
Cash
inflows
Cumulative cash
inflows
Cash
inflows
Cumulative cash
inflows
1 3780 3780 3500 3500
2 4150 7930 3850 7350
3 4550 12480 4200 11550
4 5120 17600 5150 16700
5 5010 22610 5045 21745
Payback
period 3 + (12820 – 12480) /
5120
= 3.07 years
3 + (11840 – 11550) /
5150
= 3.06 years
With the help of the payback calculation it is clear that in case of Edinburgh it is 3.07
years and for Newcastle it is 3.06 years. Both the project is having a very slight difference and as
a result of this selection of any project will not make huge difference. In case of Edinburgh the
company will recover the invested amount in time frame of 3.07 year and for Newcastle they
will be start earning the profit after the time of 3.06 years.
b. Critically evaluating payback technique
Benefits of payback period