Question

Google Corporation is considering a project that would require an investment of $374,000 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 $ 270,000 Variable expenses 26,000 Contribution margin 244,000 Fixed expenses: Salaries 44,000 Rents 57,000 Depreciation 52,000 Total fixed expenses 153,000 Net operating income $ 91,000 The scrap value of the project's assets at the end of the project would be $34,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to: (Round your answer to 1 decimal place.)

Answer 1

2.62 years

Step-by-step explanation:

initial investment $374,000

the net cash flow per period = [(net operating revenue x (1 - taxes)] + depreciation expense, since income taxes are 0, then net cash flows = net operating income + depreciation expense = $91,000 + $52,000 = $143,000

the payback period = total investment / net cash flow per period = $374,000 / $143,000 = 2.62 years

the payback period is the time it takes a project to recover its initial investment.