IAI Actuarial Core Principles · Actuarial Mathematics for Modelling · Project appraisal
A project requires an initial outlay of Rs 10,00,000 and returns Rs 3,00,000, Rs 4,00,000, Rs 5,00,000 and Rs 6,00,000 at the end of years 1 to 4 respectively. Assuming the cash flows within each year arise evenly, what is the simple (undiscounted) payback period?
The simple payback period is 2.60 years. Two years recover Rs 7 lakh, leaving Rs 3 lakh to recover from year 3's Rs 5 lakh inflow, which takes 0.6 of that year, so payback is 2 plus 0.6 years.
- A2.40 years
- B2.50 years
- C2.60 yearsCorrect
- D2.75 years
- 3.00 years
Explanation
Cumulative inflows are 3, 7 and 12 lakh at the ends of years 1, 2 and 3. After two years Rs 3,00,000 is still to be recovered, and year 3 brings Rs 5,00,000. The fraction is 3/5 = 0.6, so payback is 2.60 years. Answering 3.00 only rounds up to the whole year in which payback occurs.
Did you get it right without looking?
One question tells you little. A timed set on Project appraisal shows your real accuracy, how long you take and where you lose marks.
More Project appraisal questions
- A project requires outlays of ₹10,000 at time 0 and ₹10,000 at time 1, and returns ₹23,100 at time 2. What is the IRR (effective annual)?
- A project has a single initial outlay followed only by positive cash inflows. It is appraised at a positive effective discount rate of 8% pe…
- A project costs ₹10,000 at time 0 and returns ₹5,500 at the end of year 1 and ₹6,050 at the end of year 2. What is the IRR (effective annual…
- A machine costs Rs 500,000. It generates net cash flow of Rs 80,000 at the end of each year for 10 years and is then sold for Rs 100,000 at …
- A project has cashflows of -₹100 at time 0, +₹230 at time 1 and -₹132 at time 2 (₹ lakh). Which statement about its internal rate of return …
- 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 …