An investment of Rs. 100 lakhs is to be made for construction of a plant, which will take two years to start production. The annual profit from the operation of the plant is Rs. 20 lakhs. What will be the pay back time?

To calculate the payback time, we need to consider the initial investment and the annual profit.


Initial Investment = Rs. 100 lakhs
Annual Profit = Rs. 20 lakhs


Since the plant takes 2 years to start production, the investment is blocked for 2 years before generating revenue.


Total Investment Recovered = Initial Investment / Annual Profit
= Rs. 100 lakhs / Rs. 20 lakhs
= 5 years


However, considering the 2-year delay before production starts:


Payback Time = 2 (years before production) + 5 (years to recover investment)
= 7 years


The payback time is 7 years.

Payback Period = Depriciable Fixed Capital Investement/ After Tax Cash Flow

The answer is absolutely correct because the payback period is calculated after the startup of the plant. payback period had nothing to do with the time required in construction.

7 year

As payback period doesn't considered time valu le of money
As it defines that number of years require to recover the cash outflow invested in project
Also it doesn't consideres construction period
Hence in this case
As it will be ratio of invested cost to annual profit
= 100 lac / 20 lac
= 5 years
Means it will payback within 5 years

7 year correct answer

Wrong answer bcoz pay back time equal to ratio of total investment and profit hence 100/20 =5