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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Sagar Foods invests ₹1,00,000 in a machine that gives 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 0.909 (year 1), 0.826 (year 2) and 0.751 (year 3). Assuming even accrual within each year, the discounted payback period is nearly:

The discounted payback period is about 1.92 years. Year 1 discounted inflow of ₹54,540 leaves ₹45,460 to recover, and year 2 discounted inflow is ₹49,560, so 0.917 of year 2 is needed. The 1.67 years figure is the undiscounted payback.

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

Explanation

Discounted inflows are 54,540 (year 1), 49,560 (year 2) and 45,060 (year 3). After year 1 the unrecovered amount is 1,00,000 - 54,540 = 45,460. Fraction of year 2 needed = 45,460 / 49,560 = 0.917, so the period is 1.92 years. The figure 1.67 is the ordinary payback, which ignores discounting.

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