Question

Olinick Corporation is considering a project that would require an investment of $379,000 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 $240,000 Variable expenses 27,000 Contribution margin 213,000 Fixed expenses: Salaries 45,000 Rents 58,000 Depreciation 53,000 Total fixed expenses 156,000 Net operating income $57,000 The scrap value of the project's assets at the end of the project would be $35,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:________.a. 6.6 yearsb. 3.4 yearsc. 4.6 yearsd. 3.3 years

Answer 1

Answer:

b. 3.4 years

Explanation:

The formula to compute the payback period is shown below:

= Initial investment ÷ Net cash flow

where,  

Initial investment is $379,000

And, the net cash flow = annual net operating income + depreciation expenses

= $57,000 + $53,000

= $110,000

Now put these values to the above formula  

So, the value would equal to

= ($379,000) ÷ ($110,000)

= 3.4 years