Correct option is B
Payback period = Time taken to recover the initial investment.
Year | Cash Inflow | Cumulative Cash Inflow |
1 | 8,000 | 8,000 |
2 | 6,000 | 14,000 |
3 | 4,000 | 18,000 |
4 | 2,000 | 20,000 |
· At the end of Year 3, ₹18,000 is recovered.
· Remaining ₹500 needed from Year 4.
· Year 4 inflow = ₹2,000 → 500/2000 = 0.25 years.
· Total Payback Period = 3 + 0.25 = 3.25 years.
Information Booster:
1. Payback period shows how fast investment is recovered.
2. Shorter payback period = Lower risk.
3. Ignores time value of money.
4. Can be used for preliminary investment screening.
5. Companies often use payback along with NPV or IRR.
Additional Knowledge:
· Faster payback is preferred in uncertain environments.
· NPV considers long-term profitability better than Payback Period.
· Capital budgeting techniques like IRR and ROI help in better decision-making.
Bottom of Form
English
10 Questions
20 Marks
12 Mins
