Question

Olinick Corporation is considering a project that would require an investment of $304,000 and would last for 8 years. The incremental annual revenues and expenses generated by the project during those 8 years would be as follows (Ignore income taxes.): Sales $ 220,000 Variable expenses 23,000 Contribution margin 197,000 Fixed expenses: Salaries 30,000 Rents 43,000 Depreciation 38,000 Total fixed expenses 111,000 Net operating income $ 86,000 The scrap value of the project's assets at the end of the project would be $20,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:

Answer 1

Answer:

2 years and 5 months

Explanation:

304,000 Investment

+86,000 operating income

+ 38,000 depreciaton (non-cash expense)

124,000 cash flow per year

Note: The non-cash expense should be excluded from the calculaton of the payback period.

$\frac{Investment}{cash-flow} = payback$

304,000/124,000 = 2.451612903 years

0.451612903 x 12 = 5.419354839

2 years and 5 months