Question

. A project cost Rs.6,00,000 and yields annually a profit of Rs.90,000 after depreciation at 12.5% p.a. but before tax at 50%. Calculate pay back period.​

Answer 1

Given:

The cost of the project = Rs. 6,00,000

The project yields annually a profit (before tax) = Rs. 90,000

Tax = 50%

Depreciation = 12.5% p.a.

To find:

Pay back period

Solution:

∵ the annual profit of the project is Rs. 90000

So, the amount of tax will be = 50% of 90,000 = 0.50 * 90,000 = Rs. 45,000

∴ The profit after the tax = Rs. 90,000 – Rs. 45,000 = Rs. 45,000

Also, the initial cost of the project is given as Rs. 6,00,000

So, the amount of depreciation = 12.5% of 6,00,000 = Rs. 75,000.

Now, 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. 45,000 + Rs. 75,000 = Rs. 1,20,000

The formula for the Pay back Period is given as,

$\boxed{\bold{Pay\:back\: Period\:=\:\frac{[The \:initial\: capital\: investment]}{[The \:annual\: net \:cash\: inflow]} }}$

By substituting the values in the formula above, we get

The pay back period is,

= [Rs. 6,00,000] / [Rs. 1,20,000]

= 5 years

Thus, the pay back period is 5 years.

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Also View:

A project cost rs. 20,00,000 and yield annually rs. 2,50,000 after depreciation at 10% by using straight line method but before tax at 50%. Calculate payback period.

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