Frank Smith Plumbing Part 2: Financial Ratio Calculations

Frank Smith Plumbing Problem Data

Before proceeding, make sure to check out the data in Frank Smith Plumbing Part 1. This data is necessary to perform the cash flow financial ratios below.

Payback Period

Find payback period by first finding the last year with a negative cash flow. In this example, it is year 3. Now take the negative amount in year three and the total amount in year 4. Divide the negative amount in year three (as a positive number) by the total amount in year 4.  31,910 / 47,050, then add it to the base year of 3. This will give you a value of 3.68 years.

Discounted Payback Period

Discounted payback period uses the exact same process, but you need to use the discounted cash flows instead of the nominal cash flows. When you do this, you will find the year 4 is the last year with negative cash flow. Therefore, the calculated value is 5.54 years.

Net Present Value and IRR

Use the NPV and IRR formulas in excel.

Profitibility Index

PI can be found by dividing the NPV in the previous step by the initial outlay of the investment of 215,000. This should result in 10.3%. 

Summary of Financial Ratio Results

Pay Back Period 3.68
Discounted Pay Back Period (DPB)** 5.54
Net Present Value $22,149.25
Internal Rate of Return 15.90%
Profitability Index 10.30%

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