Post payback profitability method
By considering major drawback of payback period method, one more method is suggested i.e. Post Payback Profitability. Under this method, the cash inflows after payback period is taken into account for considering the profitability of the project. It can be calculated in the following manners.
Post Payback Profitability = Annual Cash Inflow (Estimated Life— Payback Period)
The above formula is used if there is even cash inflow. In the case of uneven cash inflows, the following formula is used.
Post Payback Profitability = Total Annual Cash Flows – Initial Investment
Post payback profitability index
Post payback profitability is used if the cost of the projects are equal. If not so, post pay back profitability Index can be calculated for it. The following formula is used to calculate Post Payback Profitability Index.
Post Payback Profitability Index = (Post Payback Period Cash Inflow / Initial Investment) x100
Generally, post payback profitability index is expressed in percentage.
NOTE: While calculating the post payback period cash inflows, the salvage value of the proposed project should be added. Besides, cash inflows refer to cash inflow after tax but before depreciation at all times.
For each of the following projects compute Post pay back profitability and Post Pay back profitability Index.
Refer this page: Calculators A to Z for more financial calculators.