Question

Check my work Required information [The following information applies to the questions displayed below.) Part 14 of 15 Cardinal Company is considering a five-year project that would require a $2,750,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 18%. The project would provide net operating income in each of five years as follows: 0.66 $2,849,000 1.122.000 1, 727,000 Variable expenses Contribution margin Fixed expenses Advertising, salaries, and other fixed out-of-pocket coats Depreciation Total fixed expenses Net operating income $752,000 550,000 1, 102,000 $ 425,000 Click here to view Exhibit 130-1 and Exhibit 130-2. to determine the appropriate discount factor(s) using table. 14. Assume a postaudit showed that all estimates including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project's actual payback period? (Round your answer to 2 decimal places.) Payback period 5.00 years

Answer 1

Payback period = 2.82 years

Working

Payback Period
	Choose Numerator	/	Choose Denominator	=	Payback Period
	Initial Investment	/	Net annual cash inflow	=	Payback Period
	$ 2,750,000	/	$ 975,000	=	2.82

.

Net income	$    425,000.00
Add: Depreciation	$    550,000.00
Net annual cash inflow	$    975,000.00

Depreciation is added back to net income because we use net cash flow from the investment during the year to calculate cash payback period.