IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
A project requires an initial outlay of Rs 10,00,000 and is expected to return Rs 3,00,000 each year, received evenly through the year, for 5 years. What is the simple (undiscounted) payback period?
The simple payback period is 3.33 years. Cumulative inflows of Rs 3,00,000 a year reach the Rs 10,00,000 outlay after 10,00,000 divided by 3,00,000 years, assuming the cash arrives evenly through each year and ignoring interest.
- A3.00 years
- B3.33 yearsCorrect
- C3.50 years
- D4.00 years
- 5.00 years
Explanation
Simple payback = outlay divided by annual inflow = 10,00,000 / 3,00,000 = 3.33 years, as inflows arrive evenly. 3.00 years wrongly rounds down and ignores the part-year needed. 5.00 years is the project life, not the payback.
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