CA Intermediate · Financial Management and Strategic Management · Investment Decisions
A project requires an initial outlay of Rs 2,00,000 and generates equal annual cash inflows of Rs 50,000 for 6 years. What is its payback period?
The payback period is 4 years. With equal annual inflows, payback equals the initial investment divided by the yearly cash inflow, so Rs 2,00,000 divided by Rs 50,000 gives four years, after which the outlay is fully recovered.
- A3 years
- B4 yearsCorrect
- C5 years
- D6 years
Explanation
Payback = initial outlay / annual inflow = 2,00,000 / 50,000 = 4 years. Check: 4 x 50,000 = 2,00,000. Six years is the project life, not the payback period, and ignores recovery of outlay.
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