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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Kaveri Polymers Ltd is evaluating a new moulding line costing Rs 80 lakh, with an expected life of 4 years and nil salvage value. Annual cash inflows after tax are Rs 30 lakh in each year. The company's cost of capital is 12%. Ignore taxes on the investment beyond what is stated. What is the payback period of the project?

The payback period is 2.67 years. With equal annual inflows of Rs 30 lakh against an outlay of Rs 80 lakh, payback is simply outlay divided by annual inflow, which gives 2.67 years. The cost of capital is not used because payback ignores the time value of money.

  1. A2.00 years
  2. B2.67 yearsCorrect
  3. C3.00 years
  4. D2.50 years

Explanation

Payback = initial outlay / annual cash inflow = 80 / 30 = 2.67 years. Option 2.00 years wrongly uses 60 lakh as the outlay, and 3.00 years wrongly rounds up to a full year. Payback ignores discounting, so the 12% cost of capital is irrelevant here.

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