CA Intermediate · Financial Management and Strategic Management · Investment Decisions
A project requires an initial outlay of ₹4,00,000 and generates uniform annual cash inflows of ₹1,00,000 for 8 years. Its payback period is:
The payback period is 4 years. When cash inflows are uniform, payback equals the initial investment divided by the annual inflow, so ₹4,00,000 divided by ₹1,00,000 gives 4 years, which is the time taken to recover the original outlay.
- A3 years
- B4 yearsCorrect
- C5 years
- D8 years
Explanation
Payback period for uniform inflows = initial outlay / annual cash inflow = 4,00,000 / 1,00,000 = 4 years. Choosing 8 years confuses the project life with payback. Choosing 5 years or 3 years has no basis in the data.
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