Calculate: payback period, net present value
Payback period tells you how many years a project takes to recover its initial cost. Net present value (NPV) adjusts all future cash flows for the time value of money and adds them up.
Formula
Payback Period = Years before full recovery + (Remaining amount / Next year's cash inflow)
Real World
A Costa Coffee franchise investing £150,000 in a new outlet that generates £50,000 net cash in Year 1, £60,000 in Year 2, and £70,000 in Year 3 reaches payback partway through Year 3 — at 2 years and 7 months.
Exam Focus
Show cumulative cash flow columns clearly and calculate payback to the nearest month — partial marks are lost by rounding to whole years.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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