CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting
Sundaram Textiles is appraising a project with an initial outlay of Rs 2,00,000 and cash inflows of Rs 1,00,000 in year 1, Rs 1,20,000 in year 2 and Rs 80,000 in year 3. What is the payback period?
Payback is 1.83 years. Year 1 recovers Rs 1,00,000 of the Rs 2,00,000 outlay, and the balance Rs 1,00,000 is recovered during year 2, which brings Rs 1,20,000, so the fraction is 1,00,000 divided by 1,20,000, or 0.83 of a year.
- A1.67 years
- B2.00 years
- C1.83 yearsCorrect
- D2.25 years
Explanation
Cumulative inflow after year 1 is Rs 1,00,000. Remaining Rs 1,00,000 is recovered in year 2: 1,00,000 / 1,20,000 = 0.83. Payback = 1.83 years. The 1.67 option wrongly uses 1,00,000/60,000-type reasoning or a wrong base; 2.00 rounds up to the whole year.
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