(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 $289,000 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 $254,000
  Variable expenses 24,000
  Contribution margin 230,000
  Fixed expenses:
     Salaries 27,000
     Rents 40,000
     Depreciation 35,000  
  Total fixed expenses 102,000
  Net operating income $128,000

The scrap value of the project's assets at the end of the project would be $17,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:( Please show work)

1.8 years

2.3 years

2.1 years

1.7 years

Explanation / Answer

In general it means how much time it will take to cover the initail investment.

cash flow after tax = Net operating income + depreciation

= 128000 + 35000

= $ 163000

Calculation of Payback Period

  

1

163000

Payback period = year of lower cash flows + ( cash flow of higher year - 0 )/diiference of cash flow of both years * diff in number of years

= 1 + 326000/163000 *1

= 1+2 = 3 years

Option 2 is correct.

Year Cash Inflows Cummulative Cash Inflows

1

163000

163000 2 163000 326000 3 163000 489000 4 163000 652000 5 163000 815000 6 163000 978000 7 163000 1141000 8 180000 13321000

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