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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

A project costs Rs 10,00,000 and yields cash inflows of Rs 3,00,000, Rs 4,00,000, Rs 4,00,000 and Rs 5,00,000 in years 1 to 4. Assuming inflows occur evenly during each year, what is the payback period?

The payback period is 2.75 years. After two years Rs 7,00,000 is recovered, leaving Rs 3,00,000. The third year produces Rs 4,00,000, so three-fourths of that year is needed, giving 2 plus 0.75 equals 2.75 years.

  1. A2.25 years
  2. B2.50 yearsCorrect
  3. C2.75 years
  4. D3.00 years

Explanation

Cumulative inflow after year 2 is 7,00,000; balance 3,00,000 is needed. Year 3 inflow is 4,00,000, so fraction is 3/4 = 0.75, giving 2.75 years. Check: 7,00,000 + 0.75 x 4,00,000 = 10,00,000. The 2.50 option wrongly uses 2 years plus half a year.

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