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Computation of Payback Period Method
1. Under uniform annual incremental cash inflows - if the venture or an asset generates uniform cash inflows then the payback period (PBP) will be given by:
PBP = Initial cost of the venture/Annual incremental cost
As like whether a venture costs 37,910/= and promises returns of 10,000/= per annum indefinitely then the PBP = 37,910/10,000
= 3.79 years
So in shorter the PBP the more viable the investment and therefore the better the option of that investments.
2. Under non-uniform cash inflows - Under non-uniformity PBP calculation will be in cumulative form and because the net cash inflows are accumulated each year till initial investment is recovered.
How are earnings calculated for the Pe ratio?
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