Skip to content

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 2,00,000 per year for 6 years. What is the payback period, and what does the payback method ignore?

The payback period is 4 years, found by dividing the Rs 8,00,000 outlay by the Rs 2,00,000 annual inflow. The method ignores cash flows arising after the payback point as well as the time value of money, so it measures liquidity rather than profitability.

  1. A4 years; it ignores cash flows after the payback point and the time value of moneyCorrect
  2. B3 years; it ignores only the time value of money
  3. C4 years; it ignores only the initial outlay
  4. D6 years; it ignores the scrap value only

Explanation

Payback = 8,00,000 / 2,00,000 = 4 years. The method ignores cash flows beyond the payback period and the time value of money. Option 3 years uses a wrong division, and it also wrongly claims only time value is ignored.

Did you get it right without looking?

One question tells you little. A timed set on Investment Decisions, Project Planning and Control shows your real accuracy, how long you take and where you lose marks.

Practise Investment Decisions, Project Planning and ControlFree diagnostic mock

More Investment Decisions, Project Planning and Control questions