Question

A production equipment costs Rs. 2,00,000. Its salvage value is Rs. 20,000. The expected return is Rs. 50,000 per annum. The corporate taxes are taken as 40

• A. 4 years
• B. 6 years
• C. 8 years
• D. 10 years

Hint:

Include tax implications in cash flow calculations for accurate payback periods.

Answer 1

The Correct Option is B

The payback period is calculated as the initial investment divided by the net annual return. After taxes, the annual return is reduced to $50,000 \times 0.6 = 30,000$. The payback period is therefore:

$\frac{2,00,000}{30,000} = 6.67$

Approximated to 6 years.