An investment of ₹100 lakhs is made to construct a plant, and construction takes 2 years before production starts. Thereafter the annual profit is ₹20 lakhs. What is the payback time measured from the time of the initial investment?

Introduction / Context:
Payback time is a simple screening metric indicating how long it takes for cumulative net profits (or cash inflows) to recover the initial investment. In capital projects with construction lead times, the clock starts at the initial outlay even if no profits accrue during construction.

Given Data / Assumptions:

• Initial investment = 100 lakhs at t = 0.
• Construction delay = 2 years with no operating profit.
• Annual profit after start-up = 20 lakhs per year (assume uniform and immediate at year end).
• Time value of money ignored (simple payback).

Concept / Approach:
Simple payback counts the number of years until cumulative profits equal the initial outlay. Because there are two years of zero profit, those years must be included in the total elapsed time to recovery.

Step-by-Step Solution:
Required cumulative profit = 100 lakhs.Annual profit once running = 20 lakhs/year.Operating years needed = 100 / 20 = 5 years.Add construction delay = 2 years.Total payback time = 5 + 2 = 7 years.

Verification / Alternative check:
Timeline check: Years 0–1: investment only; Year 2 end: still zero recovery; Years 3–7: accrue 20 lakhs each year; at end of Year 7 cumulative profit = 100 lakhs, so recovery occurs then.

Why Other Options Are Wrong:
5 years: Ignores the construction delay.10 or 12 years: Overstates recovery time; 5 years of profit is sufficient once operations begin.

Common Pitfalls:

• Confusing simple payback with discounted payback (which accounts for time value and would be slightly longer).
• Ignoring pre-operational periods when calculating total elapsed time.

Final Answer:
7 years