SIDC Module 12 Risks and returns question: simple payback period

SIDC Module 12Risks and returns

A RM1,000,000 project returns RM300,000, RM400,000 and RM500,000 at the end of years 1, 2 and 3, earned evenly within each year. What is its simple payback period?

A 2.0 years
B 2.4 years
C 2.5 years
D 2.6 years

Show the answer and explanation

Answer: D. 2.6 years

After two years the project has recovered 300,000 + 400,000 = RM700,000, leaving RM300,000. Year 3 earns RM500,000 evenly, so the remainder takes 300,000 ÷ 500,000 = 0.6 of a year: payback = 2.6 years. 2.0 years stops before the outlay is recovered. 2.4 years divides the remainder by the wrong year's flow (300,000 ÷ 750,000). 2.5 years divides the outlay by the average annual inflow (1,000,000 ÷ 400,000), which ignores the timing of the flows. Source: SIDC Module 12 Study Outline (Jul-Dec 2026) Topic 5 Risks and Returns, 5.2 Capital Budgeting; Brealey, Myers and Allen, Principles of Corporate Finance (as at October 2026).

Common mistake

Rounding to whole years instead of interpolating within the payback year.

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Related SIDC Module 12 questions

Discounting the project's inflows of RM300,000, RM400,000 and RM500,000 (years 1 to 3) at 10% gives present values of RM272,727, RM330,579 and RM375,657. On a RM1,000,000 outlay, what is the discounted payback?Kenari Bhd can invest RM1,000,000 today for cash inflows of RM300,000, RM400,000 and RM500,000 at the end of years 1 to 3. Its cost of capital is 10%. What is the project's NPV and decision?For a project costing RM1,000,000 with inflows of RM300,000, RM400,000 and RM500,000 over three years, the IRR is about 8.9%. If the cost of capital is 10%, the IRR rule says

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