(Ignore income taxes in this problem.) Neighbors Corporation is considering a pr

Question

(Ignore income taxes in this problem.) Neighbors Corporation is considering a project that would require an investment of $334,000 and would last for 8 years. The incremental annual revenues and expenses generated by the project during those 8 years would be as follows: Sales Variable expenses Contribution margin Fixed expenses: $230,000 18,000 212,000 Salaries Rents Depreciation 36,000 49,000 44,000 Total fixed expenses 129,000 Net operating income $83,000 The scrap value of the project's assets at the end of the project would be $26,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to: O 2.5 years O 2.6 years 4.0 years 3.1 years

Explanation / Answer

B. 2.6 years

Annual net cash inflow = Net operating income + Noncash deduction for depreciation = $83,000 + $44,000 = $127,000

Payback period = Investment required ÷ Annual net cash inflow = $334,000 ÷ $127,000 per year = 2.6 years

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