Project appraisal - part 1

In this lesson

1. 0:00 Introduction to project appraisal techniques
2. 0:16 Understanding investment time horizons
3. 2:19 Payback period: definition and purpose
4. 3:48 Advantages and limitations of payback period
5. 5:40 Payback period worked example calculation
6. 13:14 Strengths and weaknesses of payback period
7. 15:18 Discounted payback period overview

About this lesson

This session introduces the payback period method—a straightforward approach that calculates how long it takes for cash inflows to recover the initial investment outlay. You'll work through a practical example involving machinery investment, learning how to adjust accounting profits back to cash flows by adding back depreciation. The video walks you through calculating the payback period step-by-step, including how to determine exactly when within a year the investment breaks even, and how to compare your result against a target payback period to make an accept or reject decision. The payback period is particularly valuable as a first screening method because it focuses on early cash flows where estimates are most reliable, and it's based on objective cash movements rather than accounting adjustments. However, you'll also explore its key limitations—notably that it ignores the time value of money and disregards cash flows occurring after the payback point. Understanding both the strengths and weaknesses of this technique will prepare you for the more sophisticated appraisal methods covered in part two. This content is essential for CIMA and ACCA students studying financial management and investment appraisal, where payback period frequently appears in exam questions and case studies as a foundational concept.

Duration: 17m