Question

Check my work 14 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 points $2,849,000 1,122,000 1,727,000 Sales Variable expenses Contribution margin Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs еВook $ 752,000 550,000 Depreciation Total fixed expenses Print 1,302,000 $ 425,000 Net operating income References 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 5.00 years

Answer 1

Depreciation is a non cash expense and does not lead to cash outflow

Annual cash inflow = 2,849,000*55% - 752,000

= $814,950

Payback period = Initial investment/Annual cash inflow

= 2750,000/814950

= 3.3744 years

i.e. 3.37 years