Question

Cardinal Company is considering a project that would require a $2,805,000 investment in equipment with a...

Cardinal Company is considering a project that would require a $2,805,000 investment in equipment with a useful life of five years. At the end of five years, the project would terminate and the equipment would be sold for its salvage value of $400,000. The company’s discount rate is 14%. The project would provide net operating income each year as follows:

  

  Sales $ 2,741,000
  Variable expenses 1,125,000
  Contribution margin 1,616,000
  Fixed expenses:
  Advertising, salaries, and other
    fixed out-of-pocket costs
$ 642,000
  Depreciation 481,000
  Total fixed expenses 1,123,000
  Net operating income $ 493,000

  

Required:

Assume a postaudit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 50%. What was the project’s actual payback period? (Round your answer to 2 decimal places.)

  

  Payback period years

Nothing figuring correctly today. :(

Homework Answers

Answer #1
Calculation of Corrected Cash Inflow per annum:
Sales    2,741,000.00
Variable Expenses - 50%    1,370,500.00
Contribution    1,370,500.00
Advertisement, salaries and other fixed out-of-pocket costs        642,000.00
Cash Inflow per annum        728,500.00
Payback Period = Intial Investment / Expected Net Cash Inflow per annum
Payback Period = $2,805,000 / $728,500
Payback Period = 3.85 years (Approx.)
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