Question 2 OR (a)
Payback period and NPV of Corvus Limited's proposal
9 marks
- Time to write
- About 18 minutes
Question
Question 2 OR (a) · 9 marksCorvus Limited is considering an investment proposal that requires an initial investment of ₹60,000. The project's estimated life is five years, with no scrap value. The company uses the straight line method of depreciation, which is also allowed for tax purpose. The rate of corporate tax is 30%. Its estimated profit before depreciation and tax from the investment proposal are given below.
| Year | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| PBDT in ₹ (Profit before Dep & Tax) | 13,200 | 24,000 | 21,600 | 18,000 | 14,400 |
Calculate the following –
- Payback Period
- Net Present Value at a 10% discount rate.
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Payback PeriodCash flows year by year in one table, then discount, then a one-line decision.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Cash flows after tax 3 marks 5 min
- 2 (i) Payback period 3 marks 5 min
- 3 (ii) NPV 3 marks 5 min
- Check: arithmetic, units (₹, %), final answer underlined 2 min
Try it first. About 18 minutes for 9 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Straight-line depreciation = ₹60,000 ÷ 5 = ₹12,000 a year; tax 30%.
1Rekha puts her savings into a juice cart—the jar on the counter starts empty.
Payback periodThe number of years a project takes to recover its initial investment from its cash inflows.
2Orange by orange, the jar fills back towards what the cart cost her.
Why it is a measure of liquidityHow quickly the funds locked in a project come back and can be put to other uses.
3The jar full, the counting stops—the measure never looks at all the selling still to come.
Why it is not a measure of profitabilityIt ignores the cash inflows after the payback period, however large.
| Year | PBDT | Depreciation | PBT | Tax @ 30% | PAT | CFAT (PAT + dep.) | PV factor @ 10% | Present value |
|---|---|---|---|---|---|---|---|---|
| 1 | 13,200 | 12,000 | 1,200 | 360 | 840 | 12,840 | 0.909 | 11,671.56 |
| 2 | 24,000 | 12,000 | 12,000 | 3,600 | 8,400 | 20,400 | 0.826 | 16,850.40 |
| 3 | 21,600 | 12,000 | 9,600 | 2,880 | 6,720 | 18,720 | 0.751 | 14,058.72 |
| 4 | 18,000 | 12,000 | 6,000 | 1,800 | 4,200 | 16,200 | 0.683 | 11,064.60 |
| 5 | 14,400 | 12,000 | 2,400 | 720 | 1,680 | 13,680 | 0.621 | 8,495.28 |
| Total PV | 62,140.56 |
(i) Payback period (time to recover the outlay; flows even within a year). Cumulative CFAT: year 1 ₹12,840; year 2 ₹33,240; year 3 ₹51,960. The remaining ₹8,040 comes from year 4's ₹16,200: payback = 3 + 8,040 ÷ 16,200 = 3.496 years (about 3 years 6 months).
(ii) NPV at 10% = 62,140.56 − 60,000 = ₹2,140.56. The NPV is positive, so the proposal is acceptable.
Where the 9 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Cash flows after tax | 3 |
| 2 | (i) Payback period | 3 |
| 3 | (ii) NPV | 3 |
| Total | 9 |
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