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CHROMEX PLC
Payback period
Payback period must be based on cash flows that is the cash generated from operations and the capital invested by Chromex. Profit is different from cash flow to the extent that depreciation has been charged in the accounts. The sum inward from the sale of assets merely reduces the size of the capital investment.
This gives the following statistics for the payback calculation assuming that no further reinvestment in plant is required
Investment Cost = $150 million - $10 million = $140 million
If the labour cost savings are mistreated Annual Cash flows from Bexell's operations post take over = $10 million + $0.5 million = $10.5 million Payback period (in years) = 140/10.5 = 13.33 years or 13 years 4 months This is a conservative approximation in that it ignores the possible cash flow effects of the anticipated operating savings from reduced labour costs. If the savings are supposed to have a cash flow value of $700000 this gives an adjusted figure for cash flow as follows
Annual cash flow = $ 10.5 million + $0.7 million = $11.2 million
Payback period is thus equal to
140/112= 12.5 years or 12 years and 6 months
The insertion of the labour cost savings so reduces the payback period by 10 months.
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