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9 March, 13:52

Olinick Corporation is considering a project that would require an investment of $343,000 and would last for 8 years. The incremental annual revenues and expenses generated by the project during those 8 years would be as follows (Ignore income taxes.) : Sales $227,000 Variable expenses 52,000 Contribution margin 175,000 Fixed expenses: Salaries 27,000 Rents 41,000 Depreciation 40,000 Total fixed expenses 108,000 Net operating income 67,000 The scrap value of the project's assets at the end of the project would be $23,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to: Multiple Choice a. 3.0 years b. 5.1 years c. 3.2 years d. 4.8 years

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  1. 9 March, 13:57
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    Option (c) is correct.

    Explanation:

    Given that,

    Net operating income = $67,000

    Depreciation = $40,000

    Required investment = $343,000

    Annual net cash flows:

    = Net operating income + Depreciation

    = $67,000 + $40,000

    = $107,000

    Payback period of the project:

    = Required investment : Annual net cash flows

    = $343,000 : $107,000

    = 3.2 years

    Therefore, the payback period of the project is closest to 3.2 years.
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