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All 25 Flashcards — Payback period
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Question
When is payback most useful?
Answer
Tight cash flow businesses, fast-changing industries (tech), start-ups, or as a quick screening tool.
💡 Hint
Cash-tight, fast-change, start-up
Question
Two advantages of payback?
Answer
Simple to calculate/understand; focuses on cash flow — good for cash-limited businesses.
💡 Hint
Simple + cash-focused
Question
What is the payback period?
Answer
The time it takes for an investment to generate enough cash inflows to recover the initial cost.
💡 Hint
Time to get money back
Question
Key payback formula for uneven flows?
Answer
Years completed + (Remaining ÷ Year's cash flow) × 12 months
💡 Hint
Years + (remaining/flow) × 12
Question
How to calculate payback with uneven cash flows?
Answer
Use cumulative cash flow — add up year by year until you pass the initial cost.
💡 Hint
Cumulative method
Question
Machine costs $30k, generates $10k/year. Payback?
Answer
$30k ÷ $10k = 3 years
💡 Hint
30/10 = 3
Question
Why is payback good for tech industries?
Answer
Equipment becomes obsolete fast — need to recover investment quickly before technology changes.
💡 Hint
Obsolescence risk
Question
Two disadvantages of payback?
Answer
Ignores cash flows after payback; ignores time value of money.
💡 Hint
Post-payback + time value ignored
Question
Cost $50k. Y1:$15k, Y2:$20k, Y3:$25k. Payback?
Answer
Cumulative: Y1=$15k, Y2=$35k, Y3=$60k. Need $15k more at Y3 start. 2 + (15/25)×12 = 2 years 7.2 months.
💡 Hint
During Year 3
Question
Shorter payback = ___ risk
Answer
Lower — money comes back faster, less time exposed to uncertainty.
💡 Hint
Lower
Question
Payback ignores what two things?
Answer
Cash flows AFTER payback and the time value of money.
💡 Hint
Post-payback + time value
Question
Shorter or longer payback preferred?
Answer
Shorter — lower risk, money back faster.
💡 Hint
Shorter = less risk
Question
Formula to interpolate payback month?
Answer
Years + (Remaining ÷ That year's cash flow) × 12
💡 Hint
Years + remaining/flow × 12
Question
Why is ignoring post-payback cash flows a problem?
Answer
May reject very profitable long-term investments that generate huge returns after the payback point.
💡 Hint
Misses long-term returns
Question
Should payback be the ONLY method used?
Answer
Rarely — it's a good starting point but should be combined with ARR for a complete picture.
💡 Hint
Starting point, not the whole picture
Question
Why show the cumulative cash flow column?
Answer
Makes it easy to spot payback and earns method marks.
💡 Hint
Working + marks
Question
Why do start-ups prefer payback?
Answer
They have limited finance and need their money back quickly to survive.
💡 Hint
Limited cash = need fast return
Question
What question does payback answer?
Answer
How long before I get my money back?
💡 Hint
When do I break even?
Question
Always show this column for payback questions:
Answer
Cumulative cash flow — shows your working and when payback occurs.
💡 Hint
Cumulative column
Question
What is the time value of money?
Answer
$1 today is worth more than $1 next year — you could invest today's dollar and earn interest.
💡 Hint
Money now > money later
Question
Payback focuses on risk and ___; ARR focuses on ___
Answer
Payback = risk and cash flow. ARR = profitability.
💡 Hint
Risk vs return
Question
What is cumulative cash flow?
Answer
A running total of all cash inflows received to date.
💡 Hint
Running total
Question
Quick: Payback measures ___ while ARR measures ___
Answer
Payback = time to recover cost. ARR = average annual return as percentage.
💡 Hint
Time vs return %
Question
Payback is good for comparing projects how?
Answer
Shorter payback = lower risk. Useful as a quick screening tool before deeper analysis.
💡 Hint
Quick risk comparison
Question
Why is payback the simplest investment appraisal?
Answer
Quick to calculate, easy to understand, clear time-based answer.
💡 Hint
Quick + easy + clear
Read the notes
Full study notes for Payback period
Topic 3.8 hub
Investment appraisal
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