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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Aarav Textiles is evaluating a machine costing Rs 10,00,000 with cash inflows of Rs 2,00,000 in year 1, Rs 3,00,000 in year 2, Rs 4,00,000 in year 3 and Rs 5,00,000 in year 4. Assuming inflows accrue evenly through each year, the payback period is:

The payback period is 3.2 years. Cumulative inflows reach Rs 9,00,000 after three years, leaving Rs 1,00,000 to be recovered from year four's Rs 5,00,000 inflow, which takes 0.2 of a year.

  1. A3.0 yearsCorrect
  2. B3.4 years
  3. C2.8 years
  4. D3.25 years

Explanation

Cumulative inflows: year 1 = 2,00,000; year 2 = 5,00,000; year 3 = 9,00,000. Remaining 1,00,000 is recovered in year 4 at 5,00,000 per year, i.e. 0.2 year. Payback = 3.2 years.

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