A company is evaluating two mutually exclusive projects. Project R will cost Rs. 10000 now and will generate cash flows of Rs. 5000 each year over its life of four years. Project S will cost Rs. 2500 and will generate cash flows of Rs. 3000 each year over its life of three years. Which project would you select assuming a cost of capital of 10%.
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To calculate the payback period you can use the mathematical formula: Payback Period = Initial investment / Cash flow per year For example, you have invested Rs 1,00,000 with an annual payback of Rs 20,000. Payback Period = 1,00,000/20,000 = 5 years.
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