A proposal requires a cash outflow of ₹18,500 and is expected to generate cash inflows of ₹8,000, ₹6,000, ₹4,000, ₹2,000 and ₹2,000 over next 5 years respectively. The payback period is

Correct option is B

Payback period = Time taken to recover the initial investment.

· 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.
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