CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control
Sundaram Textiles is evaluating a machine costing Rs 8,00,000 that will generate annual net cash inflows of Rs 2,50,000 for 5 years, with no salvage value. What is the payback period of the project?
The payback period is 3.20 years. With uniform annual inflows, payback equals the initial investment divided by yearly inflow, so Rs 8,00,000 divided by Rs 2,50,000 gives 3.2 years. Salvage value and life beyond payback do not affect this measure.
- A3.20 yearsCorrect
- B3.00 years
- C3.50 years
- D4.00 years
Explanation
Payback = initial outlay / uniform annual inflow = 8,00,000 / 2,50,000 = 3.2 years. Check: 2,50,000 x 3.2 = 8,00,000. The 4.00-year option wrongly uses 8,00,000 / 2,00,000, and 3.00 ignores the fractional year.
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