UNIT 2
Solved Examples
Q.1. (Pay-Back Period- Fixed cash inflows)
A project requires an initial investment of Rs. 2,00,000 and the annual cash inflows of
Rs 50,000 for next 5 years. Calculate the payback period.
Solution:
Initial Investment (cash outflow) = Rs 2,00,000
Cash inflow = Rs 50,000
Pay-back Period = Initial Investment (Cash outflows)
Annual Cash Inflow
= 2,00,000/50,000
= 4 years
Q.2. (Pay-Back Period- Variable cash inflows)
A project requires an initial investment of Rs. 2,00,000 and the annual cash inflows for 5
years are Rs. 60,000, Rs. 80,000, Rs. 50,000, Rs. 40,000 and Rs. 30,000 respectively. Calculate
the payback period.
Solution:
Year
Cash Outflow
(Rs)
Cash Inflows
(Rs)
Cumulative Cash
Inflows (Rs.)
0
2,00,000
1
60,000
60,000
2
80,000
1,40,000
3
50,000
1,90,000
4
40,000
2,30,000
5
30,000
2,60,000
Payback Period = 3 + 10,000
40,000
=3 + 0.25 years
= 3.25 years
For understanding: Cash outflow of Rs. 2,00,000 is recovered in between year 3 and 4(see
cumulative cash flows). Till Year 3, Rs. 1,90,000 was recovered, so Rs 10,000 was yet to be
recovered in Year 4. But Rs 40,000 was total cash flow of Year 4. We need time taken to
recover Rs 10,000 which comes to 0.25 year.
Q.3. (ARR)
A machine is available for purchase at a cost of Rs. 8,00,000. It is expected to have a life of 5
years and have a scrap value of Rs. 1,00,000 at the end of five years period. The machine will
generate the following profits over its life as under:-
Year
Amount (Rs.)
1
2,00,000
2
3,00,000