Question

Investing $2,000,000 in TQM's Channel Support Systems initiative will at a minimum increase demand for your products 3.0% in this and in all future rounds. (Refer to the TQM Initiative worksheet in the CompXM Decisions menu.) Looking at the Round 0 Inquirer for Andrews, last year's sales were $163,508,343. Assuming similar sales next year, the 3.0% increase in demand will provide $4,905,250 of additional revenue. With the overall contribution margin of 34.1%, after direct costs this revenue will add $1,672,690 to the bottom line. For simplicity, assume that the demand increase and margins will remain at last year's levels. How long will it take to achieve payback on the initial $2,000,000 TQM investment, rounded to the nearest month

Answer 1

Payback is 14 months

Step-by-step explanation:

The payback period is the length taken by an investment opportunity to repay itself.In other words,it refers to how long it takes for funds invested in a project to be recouped back.

The formula for payback period=cost of investment/annual profit increase from investment

The TQM investment would cost $2,000,000

The investment would improve bottomline(profit level) by $1,672,690 annually

payback period=$2,000,000/$1,672,690=1.20

It would more appropriate to express the payback in months since it is just a little beyond one year

Payback in months=1.20*12 months=14.4 months

Approximately 14 months