Question

Olinick corporation is considering a project that would require an investment of 352,000 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 245,000 variable expenses 19,000 contribution margin 226,000 fixed expenses: salaries 37,000 rents 50,000 depreciation 45,000 total fixed expenses 132,000 net operating income 94,000 the scrap value of the project's assets at the end of the project would be 27,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:

1) 2.6 years
2) 3.2 years
3) 4.8 years
4) 5.7 years

Answer 1

The payback period for the Olinick corporation project, which generates a net operating income of $94,000 annually, would be approximately 3.7 years. When rounded to the provided options, it would be closest to 3.2 years.

Step-by-step explanation:

The question provided seeks to determine the payback period for an investment project proposed by the Olinick corporation. The payback period is a business metric used to evaluate the time required for a project to reach a breakeven point where the initial investment is fully recovered through the project's cash inflows.

To calculate the payback period, we look at the net operating income and the scrap value at the end of the project. As outlined, the project generates a net operating income of $94,000 annually. Given the scrap value is $27,000, which is realized at the end of the project's life (year 8), we need to factor this in to our total cash inflows.

The total cash inflow over the 8-year period will be ($94,000 x 8 years) + $27,000 = $783,000. The initial investment is $352,000, thus it requires calculating how many years it would take for the cumulative cash inflows to cover the initial investment. To recover $352,000 at the rate of $94,000 per year would take just under 4 years (3.7447 years), but considering the project's cash inflows occur evenly throughout the year, we can approximate it to 3.7 years when rounded. However, since 3.7 is not listed as an option, the closest answer would be 3.2 years.