Question

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. :(

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.)