Determine the approximate payback period, Finance Basics

The business plan for a new company that has obtained a 5 year lease for operating a local bus service is shown below.  Items marked with an asterisk represent continuous cash flows, however it can be assumed that they are made monthly in arrears.

Cashflow Item


Amount (thousands)




Initial set up costs



Fees from advertising contracts

1 month


Purchase of vehicles

3 months


Fares from passengers*

From 3 months onwards

+1,200 pa

Staff costs and other operating costs*

From 3 months onwards

-480 pa

Resale value of assets

5 years


You may assume that the project is financed by a loan facility based on an effective annual interest rate of 9% per annum, and interest (and any repayments of capital) is due and paid annually in arrears.

The company has a choice of paying only the interest on the loan or can repay some the loan with the interest payments. Please give a reason for your choice of interest only or with loan repayments.

Any surplus funds that the company has each year, in excess of the interest due on the loan can be invested and earns interest at the rate of 5% per annum payable half yearly.

(a) Set up a spreadsheet using Excel showing all cash flows for the term of the lease. You may want to show cash flow from the business and interest (and loan repayments separately.

(b) What is the approximate payback period?


Posted Date: 2/23/2013 7:37:33 AM | Location : United States

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