Question

From a machine that cost Rs.50,000 and has residual value of zero the following costs and revenues are expected to be derived over its life of 4 years:

Revenue per annum Rs.

Cost per annum Rs.

Years 1-3

30,000

10,000

Year 4

25,000

20,000

The cost of capital is 10%. In which year does the project payback?

A 1 year Correct Answer Incorrect Answer
B 2 years Correct Answer Incorrect Answer
C 2.5 years Correct Answer Incorrect Answer
D 3 years Correct Answer Incorrect Answer
E 4 years Correct Answer Incorrect Answer

Solution

5 years. Because the net cash inflow from year 1 to 3 is (30000-10000) = 20000 and considering an investment of 50000, it would be recovered within 2.5 years

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