Using the data in Extract F, calculate the difference in the payback period compared to the Chief Executive’s target - Edexcel - A-Level Business - Question 2 - 2022 - Paper 2

The initial investment for the new bathroom division is £700,000. To find the payback period, we need to determine how long it will take to recuperate this investment:

After 3 years, the cash received is £600,000. Therefore, the remaining amount to recover is:

$700,000 - 600,000 = 100,000$

Now, we need to calculate how long it will take to recover this remaining amount using the cash-flow from Year 4, which is £200,000. Thus, the payback period beyond the third year can be calculated as follows:

$\text{Additional time required} = \frac{100,000}{200,000} \times 12 months = 6 months$

This means the total payback period is 3 years and 6 months.

The Chief Executive’s target was a payback period of 3 years. Based on our calculations, the project will take 3 years and 6 months to pay back the investment. Therefore, the difference is:

3 years 6 months - 3 years = 6 months longer than the target.