Pay Back Period  - 4 Yrs.

You can refer to the below illustration for the your answer: 

Zenith Industries Ltd. are thinking of investing in a project costing Rs.. 20 lakhs. The life of the project is 5 years and the estimated salvage value of the project is zero. Straight line method of charging depreciation is followed. The tax rate is 50%. The expected cash  flows before tax are as follows:

You are required to determine the:

(i)     Payback period for the investment,

(ii)   Average rate of return on the investment,

(iii) Net present value at 10% cost of capital,

(iv) Benefit-cost ratio.

Solution:

Calculation of Annual Cash Inflow After Tax                                    (Rs. lakhs)                 

(i)Payback Period                                                                                 (Rs. lakhs)

                                                  Rs. 5 lakhs

Payback period      = 3 years + --------------- x 12 months = 3 years 10 months

                                                   Rs. 6 lakhs

(ii) Average Rate of Return

        Average return               = Rs.8 lakhs / 5 years            = Rs.1.6 lakhs

        Average investment       = Rs.20 lakhs / 2                   = Rs.10 lakhs

                                                 1.6

        Average rate of return = ------ x 100

                                                 10

(iii)Calculation of Net Present Value at 10% Cost of Capital                       (Rs. lakhs)

                                         P.V. of cash inflow              20.717

(iv)Benefit-Cost Ratio = ------------------------------ = ----------- = 1.036

                                          P.V. of cash outflow            20