The question is incomplete, the complete question is;
Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project:
Sales $500,000
Less cash variable expenses 200,000
Contribution margin 300,000
Less fixed expenses:
Fixed cash expenses $150,000
Depreciation expenses 37,500 187,500
Net operating income $112,500
The company's required rate of return is 10%. The payback period for this project is closest to:
Answer:
The answer is 2 years.
This is how we calculate this;
Net operating income $112,500
Non cash deduction for depreciation 37,500
investment required = $3000,000
Annual net cash inflow $150,000
Payback period = Investment required ÷ Annual net cash inflow
= $300,000 ÷ $150,000 per year = 2 years