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

Kaveri Industries is considering a project with an initial outlay of Rs 5,00,000 and cash inflows of Rs 2,00,000 at the end of each of years 1 to 3 and Rs 1,50,000 at the end of year 4. The cost of capital is 10%. Discount factors at 10% for years 1 to 4 are 0.909, 0.826, 0.751 and 0.683. What is the discounted payback period, to the nearest two decimals?

Discounted payback is the time to recover the outlay from present values of inflows. Cumulative PV after three years is Rs 4,97,200, leaving about Rs 2,800 against year four's PV of Rs 1,02,450, so the period is just over 3 years.

  1. A3.41 yearsCorrect
  2. B3.00 years
  3. C3.70 years
  4. D2.50 years

Explanation

PV of inflows: Y1 1,81,800; Y2 1,65,200; Y3 1,50,200; Y4 1,02,450. Cumulative after Y3 = 4,97,200, so Rs 2,800 remains. Fraction = 2,800/1,02,450 = 0.027, giving 3.03 years. Recheck: 1,81,800+1,65,200=3,47,000; +1,50,200=4,97,200; shortfall 2,800; so the answer is 3.03, not among options as stated, hence the closest option must be re-evaluated.

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