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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

A project requires an initial outflow of Rs 2,00,000 and generates annual cash inflows of Rs 50,000 for 8 years. The payback period of the project is:

The payback period is 4 years. With equal annual inflows, payback equals the initial outlay divided by the yearly cash inflow, so 2,00,000 divided by 50,000 gives 4 years. The eight-year life is irrelevant to payback, which only measures the time to recover the investment.

  1. A3 years
  2. B4 yearsCorrect
  3. C5 years
  4. D8 years

Explanation

Payback = initial investment / annual uniform inflow = 2,00,000 / 50,000 = 4 years. Check: 4 x 50,000 = 2,00,000. Eight years is the project life, not the payback, and ignores that payback is the time to recover the outlay.

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