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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Kaveri Packaging invests ₹1,00,000 in equipment that generates cash inflows of ₹60,000 at the end of each of the next 3 years. The cost of capital is 10%. PV factors at 10% are 0.9091 (year 1), 0.8264 (year 2) and 0.7513 (year 3). What is the discounted payback period, assuming inflows accrue evenly within a year?

The discounted payback period is about 1.92 years. After year one, discounted inflows recover 54,546, leaving 45,454. Year two's discounted inflow is 49,584, so about 0.92 of that year is needed. Simple payback of 1.67 years ignores the time value of money.

  1. A1.67 years
  2. B1.92 yearsCorrect
  3. C2.00 years
  4. D2.50 years

Explanation

Discounted inflows: year 1 = 54,546; year 2 = 49,584. Cumulative after year 1 = 54,546, leaving 45,454 to recover. Fraction of year 2 = 45,454 / 49,584 = 0.92, so payback = 1.92 years. The 1.67 years figure is the simple payback (1 + 40,000/60,000), which ignores discounting.

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