Payback period CT1 September 2016 Q10

A particular charity invests its assets in a fund on which it has a target rate of return of 8% per annum effective. From time-to-time, the charity also invests in projects that help achieve its charitable objectives whilst providing a rate of return. Projects that are accepted by the charity must fulfil each of the following criteria:

1. a minimum annual effective internal rate of return of 2% less than the target return on the investment fund.

2. a payback period of no more than ten years.

3. a positive cash flow during the fifth year or earlier.

The charity is considering investing in a social enterprise project that involves providing loans to farmers in low-income countries to help them develop better resilience against poor weather conditions. The details are as follows:

 The project involves making loans of £1m at the start of each year for three years, the first loan being made at the beginning of 2017.

 The loans will be paid back from the extra income obtained by the farmers from the beginning of 2020.

 The repayments in each year will be through level monthly instalments paid in advance with the rate of payment of the instalments increasing by 1% per year for 10 years after which the payments stop.

 The annual rate of repayment in 2020 will be £495,000.

 The charity will also incur costs at the end of each of the years in which income is received of £50,000 per annum.


confirm that the payback period is of no more than ten years


thanks in advance