CA Inter P6 · Chapter 7 · Question 1 of 10
A project costs ₹ 5,00,000 and is expected to generate cash inflows of ₹ 1,20,000, ₹ 1,50,000, ₹ 1,80,000, ₹ 2,00,000 and ₹ 1,60,000 in years 1 to 5. Its payback period is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 3.25 years
Explanation
Cumulative inflows: year 1 ₹ 1,20,000, year 2 ₹ 2,70,000, year 3 ₹ 4,50,000. A further ₹ 50,000 is needed out of year 4's ₹ 2,00,000, which is 0.25 of a year. Payback = 3 + 50,000/2,00,000 = 3.25 years. Dividing cost by the average inflow (3.09 years) is not valid when inflows are uneven.
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