How does one calculate the payback period. Initial Inv/Net cash inflows Lou Barl
ID: 2477104 • Letter: H
Question
How does one calculate the payback period. Initial Inv/Net cash inflows
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division's return on investment (ROI), which has exceeded 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: The company's discount rate is 16%. Click here to view Exhibit 11B-1 and Exhibit 11B-2. to determine the appropriate discount factor(s) using tables. Required: Calculate the payback period for each product. (Round your answers to 2 decimal places.)Explanation / Answer
1)
Product A
Payback period = Initial Invesment/Annual Cash flow
Annual Cash flow = Sales Revenue - Variable Expenses - Fixed Out of pocket operating cost
Annual Cash flow = 350000-160000-80000
Annual Cash flow = 110000
Payback period = 290000/110000
Payback period = 2.64 Years
Product B
Payback period = Initial Invesment/Annual Cash flow
Annual Cash flow = Sales Revenue - Variable Expenses - Fixed Out of pocket operating cost
Annual Cash flow = 450000-210000-60000
Annual Cash flow = 180000
Payback period = 500000/180000
Payback period = 2.78 Years
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