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CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control

Bharat Auto Components is appraising a project with an initial outlay of Rs 10,00,000. Net cash inflows are Rs 4,00,000 in year 1, Rs 5,00,000 in year 2 and Rs 6,00,000 in year 3. The discount rate is 10%. PV factors at 10% are 0.909, 0.826 and 0.751. What is the discounted payback position?

Discount each inflow at 10%: 3,63,600, 4,13,000 and 4,50,600. After two years 7,76,600 is recovered, leaving 2,23,400. Dividing by the third-year present value gives about 0.5, so discounted payback is about 2.5 years.

  1. ARecovered within 2 years
  2. BRecovered in about 2.9 yearsCorrect
  3. CRecovered in about 2.5 years
  4. DNot recovered within 3 years

Explanation

PVs: 4,00,000x0.909=3,63,600; 5,00,000x0.826=4,13,000; 6,00,000x0.751=4,50,600. Cumulative after 2 years = 7,76,600; balance 2,23,400. Fraction = 2,23,400/4,50,600 = 0.496, so about 2.5 years. Check: 2.5 years is correct; the 2.9 option is wrong.

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