1A : The management of Lanzilotta Corporation is considering a project that woul

Question

1A:

The management of Lanzilotta Corporation is considering a project that would require an investment of $218,000 and would last for 6 years. The annual net operating income from the project would be $106,000, which includes depreciation of $31,000. 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 (Ignore income taxes.): (Round your answer to 1 decimal place.)

Multiple Choice

1.6 years

2.1 years

1.3 years

1.7 years

1B:

Jark Corporation has invested in a machine that cost $57,000, that has a useful life of six years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Multiple Choice

4.7%

5.8%

8.3%

41.7%

1C:

Trovato Corporation is considering a project that would require an investment of $60,000. No other cash outflows would be involved. The present value of the cash inflows would be $73,800. The profitability index of the project is closest to (Ignore income taxes.):

Multiple Choice

0.77

0.23

1.23

0.19

Explanation / Answer

SOLUTION

Problem - 1A

Payback period = 1.6 years

Net annual cash flow = Net operating income + Depreciation

= $106,000 + $31,000

= $137,000

Payback period = Investment required / Net annual cash flow

= $218,000 / $137,000 = 1.6 years

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