You are planning to start a project. If the required initial outlay of the project is ₹ 70,000 and estimated annual cash inflows are ₹ 30,000, ₹ 20,000, ₹ 18,000, ₹ 18,000, and ₹ 15,000 for the next 5 years respectively. Estimate the payback period of the project.
To calculate the payback period, we need to determine how long it takes for the project's cash inflows to recoup the initial outlay.
First, let's find the cumulative cash inflows for each year:
Year 1: ₹ 30,000
Year 2: ₹ 30,000 + ₹ 20,000 = ₹ 50,000
Year 3: ₹ 50,000 + ₹ 18,000 = ₹ 68,000
Year 4: ₹ 68,000 + ₹ 18,000 = ₹ 86,000
Year 5: ₹ 86,000 + ₹ 15,000 = ₹ 101,000
From the cumulative cash inflows, we can determine the payback period:
Year 1: ₹ 30,000 (₹ 70,000 - ₹ 30,000 = ₹ 40,000 left)
Year 2: ₹ 50,000 (₹ 40,000 - ₹ 20,000 = ₹ 20,000 left)
Year 3: ₹ 68,000 (₹ 20,000 - ₹ 18,000 = ₹ 2,000 left)
Year 4: ₹ 86,000 (Already recouped initial outlay)
Therefore, the payback period is 4 years.