Skip to content

CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Project X: outlay Rs 6,00,000; inflows Rs 3,00,000, Rs 3,00,000, Rs 1,00,000, Rs 1,00,000, Rs 1,00,000 over five years. Project Y: same outlay; inflows Rs 1,00,000, Rs 2,00,000, Rs 3,00,000, Rs 4,00,000, Rs 5,00,000. Which statement is correct?

Project X pays back in 2 years and Project Y in 3 years, so payback favours X. This shows payback's weakness: it ignores cash flows after the cut-off, where Y earns much more in total.

  1. ABoth have the same payback period, so payback ranks them equally and reveals no drawback of the method
  2. BProject Y has the shorter payback, and payback ignores Project X's faster early recovery
  3. CProject X has payback of 2 years and Y of 3 years, so payback prefers X even though Y has larger later inflowsCorrect
  4. DProject X has payback of 3 years and Y of 4 years, so payback prefers Y

Explanation

X: 3,00,000 + 3,00,000 = 6,00,000 by year 2, so payback is 2 years. Y: cumulative 1, 3, 6 lakh, so payback is 3 years. Payback prefers X while ignoring that Y's total inflows (Rs 15,00,000 vs Rs 9,00,000) are far larger, illustrating its neglect of cash flows after payback.

Did you get it right without looking?

One question tells you little. A timed set on Project Evaluation shows your real accuracy, how long you take and where you lose marks.

Practise Project EvaluationFree diagnostic mock

More Project Evaluation questions