Uneven Cash Inflows Normally the projects are not having uniform cash inflows. In those cases the pay back period is calculated, cumulative cash inflows will be calculated and then interpreted. Exercise 3 Certain projects require an initial cash outflow of Rs. 25,000. The cash inflows for 6 years are Rs. 5,000, Rs. 8,000, Rs. 10,000, Rs. 12,000, Rs. 7,000 and Rs. 3,000. Cumulative Cash Intlows (Rs.) Year 1 2 3 4 5 Cash Intlows.(Rs.) 5.000 8.000 10.000 12,000 7.000 3.000 5.000 13.000 23,000 35,000 42.000 45,000 6 The above calculation shows that in 3 years Rs. 23,000 has been recovered Rs. 2,000, is balance out of cash outflow. In the 4th year the cash inflow is Rs. 12,000. It means the pay-back period is three to four years, calculated as follows Pay-back period - 3 years + 2000/12000 12 months - 3 years 2 months Post Pay-back Profitability Method One of the major limitations of pay-back period method is that it does not consider the cash inflows earned after pay-back period and if the real profitability of the project cannot be assessed. To improve over this method, it can be made by considering the receivable after the pay-back period. These returns are called post pay-back profits. t From the following particulars, compute: 1. Payback period. 2. Post pay-back profitability and post pay-back profitability index. (a) Cash outflow Rs. 1,00,000 Annual cash inflow Rs. 25,000 (After tax before depreciation) Estimate Life 6 years (b) Cash outflow Rx 1,00,000 Annual cash inflow (After tax depreciation) First five years Rs. 20,000 Next five years Rs. 8,000 Estimated life 10 Years Salvage value Rs. 16,000