PAYBACK PERIODMETHOD

Problem.No.1
A project costs Rs.1,00,000 and yields an annual cash inflow of Rs.20,000 for 7 years. Calculate Payback
period.

Problem.No.2
Calculate payback period for a project which requires cash outlay of Rs.10,000 and generates cash inflow of
Rs.2,000 in 1st year , Rs.4,000 in 2nd year , Rs.3,000 in 3rd year and Rs.2,000 in 4th year.

Problem.No.3
There are two projects A and B .the cost of the projects is rs.30,000 in each case. The cash inflows are as under:
Cash inflows
Year Project A Project B
1 10,000 2,000
2 10,000 4,000
3 10,000 24,000
Calculate pay back period.

Problem.No.4
A project cost Rs.5,00,000, yields annually an cash inflow of Rs.80,000 after depreciation at 12% but before
tax @ 50%. Calculate Payback period.

Problem.No.5
Ganesh and company is considering the purchase of a machine. Two machines X and Y each coting
Rs.50,000 is available. Earnings after taxation are expected to be as under. Calculate payback period.
Year Machine X(Rs.) Machine Y (Rs.)
1 15,000 5,000
2 20,000 15,000
3 25,000 20,000
4 15,000 30,000
5 10,000 20,000

Problem.No.6
A company is considering expanding its production. It can go in either for an automatic machine costing
Rs.2,24,000 with an estimated life of 5 years or an ordinary machine costing Rs.60,000 having an
estimated life of 8 years. The annual sales and costs are estimated as follows:

Automatic machine(Rs.) Ordinary machine(Rs.)

Sales 1,50,000 1,50,000
Costs:
Material 50,000 50,000
Labour 12,000 60,000
Variable overheads 24,000 20,000
Compute the comparative profitability of the proposals under pay back period method. Ignore Income tax.
Problem.No.7
Star Industries Ltd. Is considering the purchase of a new machine, which would carry out some operations,
at present being performed by hands. The two alternatives models under consideration are Camelex and
Shrilex.
The following information is available in respect of both models.
Camelex Shrilex.
Cost of machine (Rs.) 3,00,000 5,00,000
Estimated life(in years) 10 12
Estimated savings in scrap p.a(Rs.) 20,000 30,000
Additional cost of supervision per annum(Rs.) 24,000 32,000
Additional cost of maintenance per annum(Rs.) 14,000 22,000
Cost of indirect material per annum(Rs.) 12,000 16,000
Estimated savings in wages:
Wages per worker per annum(Rs.) 1,200 1,200
Workers not required(Number) 150 200
Rate of tax 50%. Using this method of pay back period suggest which model should be purchased.

Problem.No.9
A company has an investment opportunity costing Rs.40,000 with the following expected net cash flows
after taxes and before depreciation.
Year 1 to 5 Rs.7,000 each year
Year 6 to 9 Rs.8,000 each year

Problem.No.10
A company is considering an investment proposal to install a new machine. The project will cost Rs.50,000
and will have a life of 5 years and no salvage value. The companys tax rate is 50%. The company uses
straight line method of depreciation. The estimated net income before depreciation and tax from the
proposed investment proposal is as follows:
EBDAT
Years
(Rs.)
1 10,000
2 11,000
3 14,000
4 15,000
5 25,000

ACCOUNTING RATE OF RETURN METHOD (OR) AVERAGE RATE OF RETURN METHOD (ARR)
Problem.No.1
A project requires an investment of Rs.5,00,000 and has a scrap value of Rs.20,000 after 5 years. It is expected to
yield profits after taxes and depreciation during the five years amounting to Rs.40,000, Rs.60,000, Rs.70,000 ,Rs.
50,000 and Rs.20,000.Calculate the average rate of return on investment.

Problem.No.2
A project costs Rs.1,20,000. Its stream of income before depreciation and taxes during the first five years is Rs.30,000,
Rs.36,000, Rs.42,000 ,Rs.48,000 and Rs.60,000. Assume a 50% tax rate and depreciation on straight line basis.
Calculate the accounting rate of return.
Problem.No.3
A limited is considering investing in a project requiring a capital outlay of Rs.2,40,000. Forecast of annual income
after depreciation but before tax is as follows:
Years Rs.
1 1,00,000
2 1,00,000
3 80,000
4 80,000
5 40,000
Depreciation is 20% on original cost and income tax @50% of net income. Calculate the accounting rate of return.