) 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 determine the payback period of the project, we need to calculate the time it takes for the cumulative cash inflows to equal or exceed the initial outlay.
Year 1: ₹ 30,000
Year 2: ₹ 20,000
Year 3: ₹ 18,000
Year 4: ₹ 18,000
Year 5: ₹ 15,000
Cumulative cash inflows:
Year 1: ₹ 30,000
Year 2: ₹ 50,000 (₹ 30,000 + ₹ 20,000)
Year 3: ₹ 68,000 (₹ 50,000 + ₹ 18,000)
Year 4: ₹ 86,000 (₹ 68,000 + ₹ 18,000)
Year 5: ₹ 101,000 (₹ 86,000 + ₹ 15,000)
The cumulative cash inflows exceed the initial outlay of ₹ 70,000 in year 3. Therefore, the payback period of the project is 3 years.