The payback technique and accounting rate of return


Question 1:

1 2 3 4 5
Selling Price per Unit 250 250 250 250 250
Variable Cost -86 -86 -86 -86 -86
Contribution 164 164 164 164 164
Units Sold 70000 80000 100000 85000 75000
Total Contribution 11480000 13120000 16400000 13940000 12300000
less Fixed Costs 2400000 2400000 2400000 2400000 2400000
less Depreciation 4200000 4200000 4200000 4200000 4200000
EBIT 4880000 6520000 9800000 7340000 5700000
less Tax @ 40% 0.4 1952000 2608000 3920000 2936000 2280000
EAT 2928000 3912000 5880000 4404000 3420000
Add Depreciation 4200000 4200000 4200000 4200000 4200000
Net Cashflow 7128000 8112000 10080000 8604000 7620000


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Question 2

Calculation of Depreciation
(total cost of machine – salvage value)/number of years


Question 3

The payback technique overlooks the time estimation of cash. The money inflows from a venture may be sporadic, with the vast majority of the return not happening until well into what’s to come. A venture could have a satisfactory rate of return yet at the same time not meet the organization’s obliged least payback period. The payback model does not consider money inflows from the extent that may happen after the starting venture has been recuperated. Most real capital consumptions have a long life compass and keep on providing pay long after the payback period. Since the payback technique concentrates on fleeting benefit, an alluring task could be ignored if the payback period is the main thought (Horngren, 2012).

Question 4: Accounting rate of Return

EBIT 4880000 6520000 9800000 7340000 5700000
less Tax @ 40% 0.4 1952000 2608000 3920000 2936000 2280000
EAT 2928000 3912000 5880000 4404000 3420000
Add Depreciation 4200000 4200000 4200000 4200000 4200000
Net Cashflow 7128000 8112000 10080000 8604000 7620000


Question 5:

Accounting Rate of Return

The accounting rate of return is ascertained by subtracting deterioration from the aggregate money stream, then isolating the consequence of that count by the beginning speculation. The result is the rate of the introductory venture you can hope to acquire for the period. The result is utilized to land at the normal bookkeeping return rate; the bookkeeping rate of return for every year is included then partitioned by the quantity of years included in the computation.


Calculating the average rate of return is easy. Managers can rapidly see whether a venture opportunity may be sufficiently lucrative to legitimize doing further assessment. Come back to the illustration of buying new hardware to expand gainfulness. On the off chance that the introductory computation demonstrates the buy will just earn a 2 percent expansion in benefits however putting resources into trucks to convey items to the clients will lessen the transportation costs by 10 percent, then administration ought to choose the diminished delivering expenses is a finer speculation.


The biggest drawback in using the average accounting return method doesn’t take into record the time estimation of cash. This is the idea that cash is worth a known sum today, however there is no assurance what the same measure of cash will be worth later on. As such, you recognize what you can purchase today with a given measure of cash. You don’t realize what you can purchase for the same measure of cash tomorrow, and the more drawn out it takes you to win back your speculation, the more noteworthy the danger included with supporting the obtaining influence of that future cash esteem.

Question 6:

NPV= Discounted Cashflows-Initial Outlay
Discounted Cashflows
yr Cashflows Discounting Rate @ 8% present value
1 7128000 0.9259 6599815.2
2 8112000 0.8573 6954417.6
3 10080000 0.7938 8001504
4 8604000 0.735 6323940
5 7620000 0.6806 5186172
Total Present value 33065848.8
less Initial Outlay 21000000
Net Present Value 12065848.8

Question 7

Based on the Net Present Value the company should continue pursuing its PDA projects as the NPV value indicates future prospect of the project. The means that the project will be profitable.


Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial           accounting. Issues in Accounting Education25(4), 792-793.

Horngren, C. T. (2012). Cost Accounting: A Managerial Emphasis, 13/e. Pearson Education          India.

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