Calculation of Pay Back period. Year 1 2 Cash Inflows (Rs.) 20,000 40,000 60,000 70,000 Cumulative Cash Inflows (Rs.) 20,000 60,000 1,20,000 1,90,000 4 The initial investment is recovered between the 2nd and the 3rd year. 12 Balance of Unrecovered Initial Investment Payback Period = 2 years Cash Inflows during the year Initial Investment - Cumulative Cash Inflows at the end of 2nd year = 2 years + Cash Inflows in the 3rd year 12 1,00,000 - 60,000 2 years + x 12 60,000 40,000 2 years + x 12 60,000 = 2 years 8 months. 31 Illustration 7: Victory Ltd. decided to purchase a machine to increase the installed capacity. The company has four machines under consideration. The relevant details including estimated yearly expenditure and sales are given below. All sales are for cash. Corporate Tax Rate @ 33.99% (inclusive of Surcharge @ 10%, Deduction cess @ 2% and Secondary & Higher Education cess @ 1%) Particulars Initial Investment (Rs. lacs) Estimated Annual Sales (Rs. lacs) Cost of Production (Estd) (Rs. lacs) Economic Life (yrs) Scrap Values (Rs. lacs) M1 M2 M3 M4 30.00 30.00 40.00 35.00 50.00 40.00 45.00 48.00 18.00 14.00 16.70 21.00 2 3 3 4 4.00 2.50 3.00 5.00 Calculate Payback Period