Question

Cardinal Company is considering a project that would require a $2,985,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $400,000. The company’s discount rate is 16%. The project would provide net operating income each year as follows:

  

Sales			$	2,737,000
Variable expenses				1,001,000
Contribution margin				1,736,000
Fixed expenses:
Advertising, salaries, and other     fixed out-of-pocket costs	$	610,000
Depreciation		517,000
Total fixed expenses				1,127,000
Net operating income			$	609,000

  

Required:

What is the project’s payback period? (Round your answer to 2 decimal places.)

  

Project’s payback period Can't get it to come out......help me!

years

Answer 1

Annual cash flow = 609000+517000 = 1126000

Payback period = Initial investment/Annual cash flow

= 2985000/1126000

Payback period = 2.65 years