Question

Olinick Corporation is considering a project that would require an investment of $329,000 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	$	215,000
Variable expenses		28,000
Contribution margin		187,000
Fixed expenses:
Salaries		35,000
Rents		48,000
Depreciation		43,000
Total fixed expenses		126,000
Net operating income	$	61,000

The scrap value of the project's assets at the end of the project would be $25,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:

Multiple Choice

• 3.2 years

• 4.3 years

• 3.0 years

• 5.4 years

Answer 1

A. 3.2 years

Net annual cash flow = Net operating income + Depreciation = $61,000 + $43,000 = $104,000

Payback period = Investment required ÷ Net annual cash flow = $329,000 ÷ $104,000 = 3.2 years