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CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting

Bharat Auto Components is evaluating a machine costing Rs 5,00,000 that will generate net cash inflows of Rs 1,50,000 per year for 5 years. Ignoring the time value of money, what is the payback period?

The payback period is 3.33 years because the uniform annual inflow of Rs 1,50,000 recovers the Rs 5,00,000 outlay in 5,00,000 divided by 1,50,000 years. Three full years recover only Rs 4,50,000, leaving Rs 50,000 to be recovered in one-third of the fourth year.

  1. A3.00 years
  2. B3.33 yearsCorrect
  3. C3.75 years
  4. D2.50 years

Explanation

Payback = initial outlay / annual cash inflow = 5,00,000 / 1,50,000 = 3.33 years. Checking: 1,50,000 x 3.33 = about 5,00,000. The 3.00 year option ignores the part-year still needed to recover the final Rs 50,000.

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