Question

1.Calculation of payback period for the project

Initial cost of system=$34000+$15000+$3000

=$52,000

System also require annual cost of $2000.It will considered as outflow and system has annual inflow of $9000 which will increase 10% annually and $2000 in form of intangible benefit.

Statement showing cummulative cash flow:

Year	Cash inflow(a)	Cash outflow(b)	Net Cash flow(a-b)	Cummulative cash flow
0	0	-$52,000	-$52,000	-$52,000
1	$9000+$2000=$11000	-$2000	$9000	-$43000
2	$9000(1.10)+$2000	-$2000	$9900	-$33,100
3	$9900(1.10)+$2000	-$2000	$10,890	-$22,210
4	$10890(1.10)+$2000	-$2000	$11,979	-$10231
5	$11,979(1.10)+$2000	-$2000	$13,176.90	$2945.90
6
7

Payback Period=A+(B/C)

A=Last year with negative cummulative cash flow

B=Cummulative cash flow without negative sign at the end of period A

C=Net Cash flow during the period following year A

Payback Period=4+($10,231/$13,176.90)

=4+0.78

=4.78 years

1.Calculation of payback period for the project

Initial cost of system=$34000+$15000+$3000

=$52,000

System also require annual cost of $2000.It will considered as outflow and system has annual inflow of $9000 which will increase 10% annually and $2000 in form of intangible benefit.

Statement showing cummulative cash flow:

Year	Cash inflow(a)	Cash outflow(b)	Net Cash flow(a-b)	Cummulative cash flow
0	0	-$52,000	-$52,000	-$52,000
1	$9000+$2000=$11000	-$2000	$9000	-$43000
2	$9000(1.10)+$2000	-$2000	$9900	-$33,100
3	$9900(1.10)+$2000	-$2000	$10,890	-$22,210
4	$10890(1.10)+$2000	-$2000	$11,979	-$10231
5	$11,979(1.10)+$2000	-$2000	$13,176.90	$2945.90
6
7

Payback Period=A+(B/C)

A=Last year with negative cummulative cash flow

B=Cummulative cash flow without negative sign at the end of period A

C=Net Cash flow during the period following year A

Payback Period=4+($10,231/$13,176.90)

=4+0.78

=4.78 years

Question:

what is the ROI here

Answer 1

COST OF INVESTMENT	NET CASH FLOW	ROI
52000(YEAR 01)	9000	17.3%
52000(YEAR 02)	9900	19%
52000(YEAR 03)	10890	20.09%
52000(YEAR 04)	11979	23%
52000(YEAR 05)	13176.90	25.3%

ROI FORMULA

ROI=NET INCOME /COST OF INVESTMENT

YEAR 1:

ROI =9000/52000

ROI=0.173 (CONVERTING INTO %)

ROI =17.3

YEAR 2 :

ROI=9900/52000

=0.190(CONVERTING INTO %)

ROI=19%

YEAR 3 :

ROI =10890/52000

=0.209(CONVERTING INTO %)

=20.9%

YEAR 4 :

ROI=11979/52000

=0.230(CONVERTING INTO %)

ROI=23%

YEAR 5 :

ROI=13176.90/52000

=0.253(CONVERTING INTO %)

=25.3%

THESE ARE THE ROI OF EACH YEAR.

_{WITH STABLE ANNUAL BENEFITS}

ROI=1/PAYBACK PERIOD OR

PAYBACK PERIOD =1/ROI

ROI=?

PAYBACK PERIOD = 4.78 YEARS

SO,

ROI=1/PAYBACK PERIOD

=1/4.78

=0.209%

ROI =0.209%

OR

PAYBACK =1/ROI

=1/0.209

=4.78

note: this is average ROI .

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