Jarvey Corporation is studying a project that would have a ten-year life and would require a $450,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project (Ignore income taxes.) : Sales $ 500,000 Less cash variable expenses 200,000 Contribution margin 300,000 Less fixed expenses: Fixed cash expenses $ 150,000 Depreciation expenses 45,000 195,000 Net operating income $ 105,000 The company's required rate of return is 12%. What is the payback period for this project?

Question

Payton Floyd

Business

29 October, 12:18

Jarvey Corporation is studying a project that would have a ten-year life and would require a $450,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project (Ignore income taxes.) : Sales $ 500,000 Less cash variable expenses 200,000 Contribution margin 300,000 Less fixed expenses: Fixed cash expenses $ 150,000 Depreciation expenses 45,000 195,000 Net operating income $ 105,000 The company's required rate of return is 12%. What is the payback period for this project?

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Lyla Proctor · Answer 1

3 years

Explanation:

Since the income tax is ignored, so the operating cash flows would be

= EBIT + Depreciation - Income tax expense

= $105,000 + $45,000 - $0

= $150,000

The operating cash flows are same for ten years

And, the initial investment is $450,000

So, the payback period would be

= Initial investment : Net cash flows

= $450,000 : $150,000

= 3 years