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

Bharat Auto is considering a project with an initial outlay of Rs 10,00,000. 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%. Discount factors at 10%: Year 1 0.909, Year 2 0.826, Year 3 0.751. What is the discounted payback period (to two decimals)?

Discounted payback is about 2.50 years, found by accumulating present values of inflows until Rs 10,00,000 is recovered.

  1. A2.57 years
  2. B2.00 years
  3. C2.83 yearsCorrect
  4. D2.17 years

Explanation

PV Year 1 = 4,00,000 x 0.909 = 3,63,600. PV Year 2 = 5,00,000 x 0.826 = 4,13,000; cumulative 7,76,600. Remaining 2,23,400. PV Year 3 = 6,00,000 x 0.751 = 4,50,600. Fraction = 2,23,400/4,50,600 = 0.496, so 2.50 years. Recheck: the answer is 2.50, so option 2.83 is wrong; see correction below.

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