Olinick Corporation is considering a project that would require an investment of

Question

Olinick Corporation is considering a project that would require an investment of $304,000 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.):

The scrap value of the project's assets at the end of the project would be $20,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:

Sales $ 220,000 Variable expenses 23,000 Contribution margin 197,000 Fixed expenses: Salaries 30,000 Rents 43,000 Depreciation 38,000 Total fixed expenses 111,000 Net operating income $ 86,000

Explanation / Answer

Ans.

Payback Period of the Project = Investment Required for the Project / Net Annual Cash inflow

= $304,000 / $124,000 = 2.5 Years

Investment Required for the Project = $304,000

Net Annual Cash Inflow = Annual Cash Inflow - Annual cash Outflow = $220,000 - $96,000 = $124,000

Annual Cash Inflow (sales) = $220,000

Annual Cash Outflow = (Variable Expenses + Salaries + Rent ) = ($23,000 + $30,000 + $43,000 ) = $96,000

Note :- Deprication is Non- cash Expenses

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