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A project cost Rs . 15,60,000 and yields annually a profit of Rs. 2,70,400 after depreciation of 12% p.a but before tax at 25% . calculate the pay back period. |
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Answer» tion:Answer:Step 1:The project yields annually, i.e., the PROFIT before tax = Rs. 2,50,000Tax = 50%So, the amount of tax = 50% of 2,50,000 = 0.50 * 2,50,000 = Rs. 1,25,000∴ The profit after the tax = Rs. 2,50,000 – Rs. 1,25,000 = Rs. 1,25,000Step 2:The initial cost of the project = Rs. 20,00,000Depreciation = 10%So, the amount of depreciation = 10% of 20,00,000 = Rs. 2,00,000.We KNOW that the depreciation does not CAUSE the outflow of the cash, therefore, it is added back into the amount of profit after tax i.e.,The ANNUAL net cash inflow = Rs. 2,00,000 + Rs. 1,25,000 = Rs. 3,25,000Step 3:The formula for the Payback Period is given as,[The initial capital investment] / [The annual net cash inflow]Thus, The payback period is,= [Rs. 20,00,000] / [Rs. 3,25,000]= 6.15 years≈ 6.2 years |
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