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CA Intermediate · Financial Management and Strategic Management · Investment Decisions

Sundaram Packaging invests ₹1,00,000 in a machine that yields a cash inflow of ₹50,000 at the end of each year for 4 years. The discount rate is 10%, with PV factors for years 1 to 4 of 0.909, 0.826, 0.751 and 0.683. Assuming cash flows occur evenly through each year after discounting, what is the discounted payback period (approximately)?

The discounted payback is about 2.35 years. After two years the discounted inflows total ₹86,750, leaving ₹13,250 to recover. Year 3's discounted inflow is ₹37,550, so the fraction is 0.353. Using undiscounted flows would wrongly give two years.

  1. A2.00 years
  2. B2.27 years
  3. C2.35 yearsCorrect
  4. D3.00 years

Explanation

Discounted inflows: Year 1 = 45,450; Year 2 = 41,300; Year 3 = 37,550. Cumulative at the end of year 2 = 86,750, so 13,250 remains. Fraction = 13,250 / 37,550 = 0.353, giving 2.35 years. The 2.27 option divides the balance by the undiscounted ₹50,000, and 2.00 is the simple payback.

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