Olinick Corporation is considering a project that would require an investment of $338,000 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 | $ | 269,000 | |
Variable expenses | 20,000 | ||
Contribution margin | 249,000 | ||
Fixed expenses: | |||
Salaries | 28,000 | ||
Rents | 41,000 | ||
Depreciation | 36,000 | ||
Total fixed expenses | 105,000 | ||
Net operating income | $ | 144,000 | |
The scrap value of the project's assets at the end of the project would be $18,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:
Answer
1.9 years (or 1.88 years)
Calculations:
Net operating Income | $ 144,000 |
Add: depreciation | $ 36,000 |
Net cash inflows (A) | $ 180,000 |
Initial Investment (B) | $ 338,000 |
Payback period (B/A) | 1.9 |
In case of any doubt, please comment.
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