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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Sharma Textiles Ltd is evaluating a machine costing Rs 10,00,000 that is expected to generate net annual cash inflows of Rs 2,50,000 each year. What is the payback period of the project?

The payback period is 4 years. It is found by dividing the initial outlay of Rs 10,00,000 by the constant annual cash inflow of Rs 2,50,000, which gives 4 years, the time needed to recover the original investment from cash inflows.

  1. A3 years
  2. B4 yearsCorrect
  3. C5 years
  4. D2.5 years

Explanation

Payback period = initial investment / annual cash inflow = 10,00,000 / 2,50,000 = 4 years. Checking: 4 x 2,50,000 = 10,00,000. Three years would recover only Rs 7,50,000, so it is wrong.

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