Question

Olinick Corporation is considering a project that would require an investment of $289,000 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$254,000 Variable expenses 24,000 Contribution margin 230,000 Fixed expenses: Salaries 27,000 Rents 40,000 Depreciation 35,000 Total fixed expenses 102,000 Net operating income$128,000 The scrap value of the project's assets at the end of the project would be $17,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to: (Round your answer to 1 decimal place.) Noreen_5e_Rechecks_2019_10_16 Multiple Choice 1.8 years 2.3 years 2.1 years 1.5 years

Answer 1

1.8 years

Step-by-step explanation:

the net cash flow per year = [(total sales revenue - total costs) x (1 - tax rate)] + depreciation

• total sales revenue = $254,000
• total costs = $126,000
• depreciation costs = $35,000
• taxes = 0

the net cash flow per year = $254,000 - $126,000 + $35,000 = $163,000

the payback period = total investment / net cash flow = $289,000 / $163,000 = 1.77 years, which is closest to 1.8 years

The payback period is the time it takes the project to recover the initial investment required to carry it out.