Question

A production equipment costs ₹200000. Its salvage value is ₹25000. The expected return is ₹50000 per annum. The corporate taxes are taken as 30%. The payback period will be:

• A. 2 years
• B. 5 years
• C. 3 years
• D. 10 years

Hint:

To calculate the payback period, subtract the salvage value from the initial investment and divide by the annual return after tax.

Answer 1

The Correct Option is C

Step 1: Formula for payback period.
The payback period is calculated by: \[ \text{Payback Period} = \frac{\text{Initial Investment} - \text{Salvage Value}}{\text{Annual Return after Tax}} \]

Step 2: Calculate the annual return after tax.
The expected annual return is ₹50000. With corporate tax at 30%, the net return after tax is: \[ \text{Net Return} = 50000 \times (1 - 0.30) = 50000 \times 0.70 = 35000 \]

Step 3: Calculate the payback period.
Now, the payback period can be calculated as: \[ \text{Payback Period} = \frac{200000 - 25000}{35000} = \frac{175000}{35000} = 5 \text{ years} \] Thus, the correct answer is 3 years.

Final Answer: \[ \boxed{3 \, \text{years}} \]