CA Intermediate · Financial Management and Strategic Management · Investment Decisions
A project needs an initial outlay of Rs 2,40,000 and is expected to generate uniform annual cash inflows of Rs 60,000 for 6 years. What is its payback period?
The payback period is 4 years. With uniform annual inflows, payback equals the initial investment divided by the yearly cash inflow, which is Rs 2,40,000 divided by Rs 60,000. Four years of inflows recover the outlay exactly, regardless of the six-year life.
- A3 years
- B4 yearsCorrect
- C5 years
- D6 years
Explanation
Payback = initial outlay / annual inflow = 2,40,000 / 60,000 = 4 years. Check: 4 x 60,000 = 2,40,000. Choosing 6 years confuses payback with the project life.
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