Illustration 1 Bright Okoronwko runs a manufacturing business. The project involves an immediate cash outlay of ₦200,000. He estimated the net cash inflows from the projects to be as follows: Year ₦ 1 20,000 2 60,000 3 180,000 4 100,000 You are required to compute the PBP Illustration 2 Two projects A and B with the following relevant information Project A Project B Year ₦ ₦ 0 200,000 200,000 1 60,000 80,000 2 80,000 80,000 3 80,000 40,000 4 100,000 60,000 5 60,000 Required: Compute the payback period.

Let's compute the Payback Period (PBP) for both illustrations. The Payback Period is the time it takes for an investment to generate enough cash flow to cover its initial cost. Illustration 1: Bright Okoronwko's Business Step 1: Calculate the cumulative cash flow for the project. Initial Outlay = ₦200,000 Year | Net Cash Inflow (₦) | Cumulative Cash Flow (₦) -----|---------------------|-------------------------- 0 | - | -200,000 1 | 20,000 | -200,000 + 20,000 = -180,000 2 | 60,000 | -180,000 + 60,000 = -120,000 3 | 180,000 | -120,000 + 180,000 = 60,000 Step 2: Identify the year when the cumulative cash flow turns positive. The cumulative cash flow becomes positive in Year 3. This means the payback period is between Year 2 and Year 3. Step 3: Calculate the fractional part of the year. The amount remaining to be recovered at the end of Year 2 is ₦120,000. The cash inflow in Year 3 is ₦180,000. Fractional part = (Amount to be recovered) / (Cash flow in the next year) Fractional part = ₦120,000 / ₦180,000 Fractional part = 0.6667 years (approximately) Step 4: Add the full years and the fractional part. Payback Period = 2 years + 0.6667 years Payback Period = 2.67 years --- Illustration 2: Projects A and B Project A Step 1: Calculate the cumulative cash flow for Project A. Initial Outlay = ₦200,000 Year | Net Cash Inflow (₦) | Cumulative Cash Flow (₦) -----|---------------------|-------------------------- 0 | - | -200,000 1 | 60,000 | -200,000 + 60,000 = -140,000 2 | 80,000 | -140,000 + 80,000 = -60,000 3 | 80,000 | -60,000 + 80,000 = 20,000 Step 2: Identify the year when the cumulative cash flow turns positive. The cumulative cash flow becomes positive in Year 3. This means the payback period is between Year 2 and Year 3. Step 3: Calculate the fractional part of the year. The amount remaining to be recovered at the end of Year 2 is ₦60,000. The cash inflow in Year 3 is ₦80,000. Fractional part = (Amount to be recovered) / (Cash flow in the next year) Fractional part = ₦60,000 / ₦80,000 Fractional part = 0.75 years Step 4: Add the full years and the fractional part. Payback Period = 2 years + 0.75 years Payback Period for Project A = 2.75 years --- Project B Step 1: Calculate the cumulative cash flow for Project B. Initial Outlay = ₦200,000 Year | Net Cash Inflow (₦) | Cumulative Cash Flow (₦) -----|---------------------|-------------------------- 0 | - | -200,000 1 | 80,000 | -200,000 + 80,000 = -120,000 2 | 80,000 | -120,000 + 80,000 = -40,000 3 | 40,000 | -40,000 + 40,000 = 0 Step 2: Identify the year when the cumulative cash flow turns positive or zero. The cumulative cash flow becomes exactly zero at the end of Year 3. Payback Period for Project B = 3 years What's next? 📸