Question

Olinick Corporation is considering a project that would require an investment of $309,000 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	$	235,000
Variable expenses		24,000
Contribution margin		211,000
Fixed expenses:
Salaries		31,000
Rents		44,000
Depreciation		39,000
Total fixed expenses		114,000
Net operating income	$	97,000

The scrap value of the project's assets at the end of the project would be $21,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:

a. 2.3 years

b. 2.8 years

c. 3.2 years

d. 2.2 Years

Answer 1

a. 2.3 years
PBP
Time	Amount	Cumulative
-	(309,000.00)	(309,000.00)
1.00	136,000.00	(173,000.00)
2.00	136,000.00	(37,000.00)
3.00	136,000.00	99,000.00
4.00	136,000.00	235,000.00
5.00	136,000.00	371,000.00
6.00	136,000.00	507,000.00
7.00	136,000.00	643,000.00
8.00	157,000.00	800,000.00
PBP= 2 + 37000/136000
PBP= 2 + .27 Years
PBP= 2.27 Years or 2.3 Years approx