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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Mahalaxmi Textiles buys a machine for Rs 12,00,000 that generates uniform annual cash inflows of Rs 3,00,000 after tax. What is the payback period?

The payback period is 4 years. With equal yearly cash inflows, payback is the initial investment divided by the annual inflow, so Rs 12,00,000 divided by Rs 3,00,000 gives exactly four years for recovering the original outlay.

  1. A3 years
  2. B4 yearsCorrect
  3. C5 years
  4. D6 years

Explanation

Payback for uniform inflows = initial outlay / annual cash inflow = 12,00,000 / 3,00,000 = 4 years. Choosing 3 years would come from wrongly dividing by 4,00,000, and 5 or 6 years have no basis in the data.

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