Question

A project costs .5,00,000 and yields annually a profit of

.80,000 after depreciation at 12% p.a. but before tax at 50%.

Calculate pay-back period.​

Answer 1

Answer:

5 years

Explanation:

Profit before tax = 80000

Less tax @ 50% = 80000 – (80000x 50/100)

Profit after tax = 40000

Add depreciation @ 12% = 500000×12/100 = 60000

Profit after tax and before depreciation = 40000+ 60000= 100000

Pay back period = Cost of project / Annual cash inflow.

= 500000 / 100000 = 5 Years

Answer 2

The pay-back period is 5 years.

Explanation:

Given:

A project costs 5,00,000.

yields annually a profit of 80,000.

After depreciation at 12% p.a.

Before tax at 50%.

To Find:

The pay-back period.

Solution:

Profit before tax =80000

Less tax @ 50%  $=80000\times\frac{50}{100} =40000$

Profit after tax $=80000-40000=40000$

Project costs =5,00,000

Depreciation cost @12%$=500000\times\frac{12}{100} = 60000$

Total Cash flow=Profit after tax+Depreciation cost

                         $=40000+60000\\=100000$

$Pay-back\ period=\frac{Total\ initial\ capital\ investment}{Total\ cash\ inflow}$

$Pay-back\ period=\frac{500000}{100000}$

                             $= 5 \ years$

Thus,the pay-back period is 5 years.

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