---
title: "NPV and payback of a startup project"
subject: "Entrepreneurship Development"
chapter: 5
key: "semester_7/entrepreneurship_development:npv-payback-startup-project"
source: https://www.bctengineer.com/q/semester_7/entrepreneurship_development/npv-payback-startup-project
site: BCT Engineering
---

# NPV and payback of a startup project

Entrepreneurship Development · Chapter 5: Development of Business Plan and Execution

- Asked in: year not given, 6 marks
- Video: [Capital Budgeting: NPV, IRR, Payback | MUST-KNOW for Finance Roles](https://www.youtube.com/watch?v=7gG0Evugubo) — Kenji Explains
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_7/entrepreneurship_development/npv-payback-startup-project
- Whole chapter: https://www.bctengineer.com/md/semester_7/entrepreneurship_development/chapter-5

## Question

A startup plans to invest Rs 20,00,000 in a machine. Expected net cash inflows are Rs 6,00,000, Rs 7,00,000, Rs 8,00,000 and Rs 9,00,000 in years 1 to 4 respectively. The required rate of return is 12%. Calculate the payback period and the net present value (NPV), and state whether the project should be accepted.

## Short answer

Payback = 2 + 7,00,000/8,00,000 = 2.875 years. NPV = PV sum (Rs 22,35,140) minus Rs 20,00,000 = Rs 2,35,140. NPV > 0, so accept the project.

## Answer

#### Payback period
| Year | Inflow (Rs) | Cumulative (Rs) |
|---|---|---|
| 1 | 6,00,000 | 6,00,000 |
| 2 | 7,00,000 | 13,00,000 |
| 3 | 8,00,000 | 21,00,000 |
| 4 | 9,00,000 | 30,00,000 |

The investment is recovered in year 3. Balance needed at the start of year 3 = 20,00,000 - 13,00,000 = 7,00,000.

$$
\text{Payback} = 2 + \frac{7{,}00{,}000}{8{,}00{,}000} = 2.875\ \text{years}
$$

#### Net present value
$$
\text{NPV} = \sum_{t=1}^{n} \frac{CF_t}{(1+r)^t} - I_0
$$

| Year | Inflow (Rs) | Factor $1/1.12^t$ | PV (Rs) |
|---|---|---|---|
| 1 | 6,00,000 | 0.8929 | 5,35,714 |
| 2 | 7,00,000 | 0.7972 | 5,58,036 |
| 3 | 8,00,000 | 0.7118 | 5,69,424 |
| 4 | 9,00,000 | 0.6355 | 5,71,966 |
| Total | | | 22,35,140 |

$$
\text{NPV} = 22{,}35{,}140 - 20{,}00{,}000 = \text{Rs } 2{,}35{,}140
$$

#### Decision
NPV is positive, so the project earns more than the required 12% and should be accepted. Payback of 2.9 years is acceptable if the machine life is longer than that; payback ignores cash flows after recovery and the time value of money, so NPV is the stronger test.

**Answer:** Payback = 2.875 years; NPV = Rs 2,35,140 (positive); accept the project.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. Payback is:
   A. 2.875 years
   B. 3 years
   C. 2.5 years
   D. 4 years
   Answer: A. 2 + 7,00,000/8,00,000 = 2.875. (Key point: Payback)

2. Year 2 inflow is discounted by:
   A. 1/1.12
   B. 1/1.12^2
   C. 1.12^2
   D. 2 x 0.12
   Answer: B. Each inflow is divided by (1+r)^t. (Key point: Discounting)

3. NPV is:
   A. Rs 22,35,140
   B. Rs 10,00,000
   C. Rs 2,35,140
   D. -Rs 2,35,140
   Answer: C. PV total 22,35,140 minus 20,00,000. (Key point: NPV)

4. Why accept the project?
   A. Payback exceeds 2 years
   B. Total inflows are Rs 30 lakh
   C. Payback considers time value
   D. NPV is positive so return exceeds 12%
   Answer: D. Positive NPV means the project earns more than required return. (Key point: Decision)

## Related in Entrepreneurship Development

- [Key financial indicators: burn rate and runway](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Aburn-rate-runway-indicators) — Entrepreneurship Development, chapter 6
- [Break-even analysis for a startup](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Abreak-even-analysis-numerical) — Entrepreneurship Development, chapter 5
- [Defining market size using TAM, SAM, SOM](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Amarket-size-tam-sam-som) — Entrepreneurship Development, chapter 3
- [Customer lifetime value and CAC numerical](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Altv-cac-unit-economics) — Entrepreneurship Development, chapter 4
- [Equity versus debt financing with EMI](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Aequity-vs-debt-financing-emi) — Entrepreneurship Development, chapter 6
- [Cost-plus pricing numerical](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Apricing-cost-plus-numerical) — Entrepreneurship Development, chapter 3

## Related in other subjects

- [Conventional vs project financing; ARR, NPV, PI, payback](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aconventional-vs-project-financing-numerical) — Project Engineering, chapter 6
- [EVA; 60 days, 25% work, Rs 12,00,000](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aeva-numerical-60-days-25-percent) — Project Engineering, chapter 4
- [EPS and book value; ABC project Rs 6,00,000](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aeps-bv-abc-project-600000-b79) — Project Engineering, chapter 6
- [EPS and book value; Rs 10,00,000, 3500 shares](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aeps-bv-capital-1000000-3500-shares) — Project Engineering, chapter 6