Question

Required information [The following information applies to the questions displayed below.] Cardinal Company is considering a five-year project that would require a $2,955,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 16%. The project would provide net operating income in each of five years as follows: $ 2,871,000 1,018,000 1,853,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs Depreciation Total fixed expenses Net operating income $ 753,000 591,000 1,344,000 $ 509,000 Click here to view Exhibit 13B-1 and Exhibit 13B-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 L years

Answer 1

Calculate net operating income

Sales	2871000
Variable cost	1291950
Contribution margin	1579050
Fixed cost	1344000
Net operating income	235050

Annual Cash flow = 235050+591000 = 826050

Payback period = 2955000/826050 = 3.58 years