Accounting for Managers: Interpreting accounting information for decision-making

190 ACCOUNTING FOR MANAGERS

Year Inflow Outflow

1 75,000 30,000

2 90,000 40,000

3 100,000 45,000

4 100,000 50,000

5 75,000 40,000

The company wishes to consider the return on investment (each year and average),
payback and net present value as methods of evaluating the proposal.
The depreciation expense is £40,000 per year. Net cash flows and profits are
as follows:

Year Inflow Outflow Net cash flow Depreciation Profit

1 75,000 30,000 45,000 40,000 5,000

2 90,000 40,000 50,000 40,000 10,000

3 100,000 45,000 55,000 40,000 15,000

4 100,000 50,000 50,000 40,000 10,000

5 75,000 40,000 35,000 40,000 −5,000

Return on investment:

12345

Investment 160 120 80 40 0

Profit 5 10 15 10 − 5

ROI 3.125% 8.33% 18.75% 25% –

Over the five years:

Profit £35/ 5 =£7 Investment £200/ 2 =£100

ROI 7/ 100 =7%

Cumulative cash flows are:

Year Cash flow Cumulative

145 45

250 95

3 55 150

4 50 200