(Ignore income taxes in this problem.) Czaplinski Corporation is considering a p

Question

(Ignore income taxes in this problem.) Czaplinski Corporation is considering a project that would require an investment of $523,000 and would last for 6 years. The incremental annual revenues and expenses generated by the project during those 6 years would be as follows:

21,000

137,000

59,000

94,000  

$43,000  

The scrap value of the project's assets at the end of the project would be $30,000. The payback period of the project is closest to:

  Sales $158,000   Variable expenses

21,000

  Contribution margin

137,000

  Fixed expenses:      Salaries 20,000      Rents 15,000        Depreciation

59,000

  Total fixed expenses

94,000  

  Net operating income

$43,000  

Explanation / Answer

Net Cash flow 1-5 years Contribution margin 137000 Less: Salaries 20000 Rents 15000 Net Cash Flow 102000 6th year Contribution margin 137000 Salvage value 30000 Less: Salaries 20000 Rents 15000 Net Cash Flow 132000 Pay back period Commulative Year Cash Flow Cash Flow 0 -523000 -523000 1 102000 -421000 2 102000 -319000 3 102000 -217000 4 102000 -115000 5 102000 -13000 6 132000 119000 Payback period = 5 + 13000/132000            = 5 + 0.11             = 5.11 years

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