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 net cash inflows of Rs 2,50,000 every year for 5 years. Ignoring the time value of money, what is the payback period of the machine?
The payback period is 3.2 years, because for uniform annual inflows it equals the initial outlay divided by the annual inflow. Rs 8,00,000 divided by Rs 2,50,000 gives 3.2 years, with no discounting applied.
- A3.2 yearsCorrect
- B3.5 years
- C4.0 years
- D2.5 years
Explanation
Payback = Initial outlay / annual uniform inflow = 8,00,000 / 2,50,000 = 3.2 years. The 4.0 years option wrongly divides by Rs 2,00,000. The 2.5 years option inverts the ratio with the inflow.
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