CA INTERMEDIATE: COSTING & FM · INVESTMENT DECISIONS

Payback period

Even cash flows: Payback = Investment ÷ Annual cash inflow. Uneven: full years until cumulative inflow nearly covers cost + (amount still needed ÷ next year’s inflow).

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Worked examples

Example 1 · level 1

Reddy Cements invests ₹2,16,000 in a machine that generates an even cash inflow of ₹36,000 a year. Find the payback period (years).

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Payback = ₹2,16,000 ÷ ₹36,000 = 6 years.

Answer: 6 years

Example 2 · level 2

Patel Packaging: project cost ₹1,48,000; cash inflows Year 1 ₹79,000, Year 2 ₹51,000, Year 3 ₹72,000, Year 4 ₹37,000. Find the payback period in years (assume inflows arise evenly within a year).

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After 2 years: ₹1,30,000 recovered; still needed ₹18,000.
Fraction of year 3 = 18,000 ÷ 72,000 = 0.25.
Payback = 2 + 0.25 = 2.25 years.

Answer: 2.25 years

Example 3 · level 3

Mehta Polymers: project cost ₹1,38,000; cash inflows Year 1 ₹20,000, Year 2 ₹74,000, Year 3 ₹20,000, Year 4 ₹48,000, Year 5 ₹34,000. Find the payback period in years (assume inflows arise evenly within a year).

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After 3 years: ₹1,14,000 recovered; still needed ₹24,000.
Fraction of year 4 = 24,000 ÷ 48,000 = 0.5.
Payback = 3 + 0.5 = 3.5 years.

Answer: 3.5 years