(Ignore income taxes in this problem.) 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: 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:

A) 3.0 years
B) 5.1 years
C) 3.2 years
D) 4.8 years

Question

(Ignore income taxes in this problem.) 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:

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:

A) 3.0 years
B) 5.1 years
C) 3.2 years
D) 4.8 years

THONG Doan Chanh · Accepted Answer

Final Answer : C, Explanation :  To calculate payback period, we need to determine the time it takes for the cumulative cash inflows to equal or exceed the initial investment of $343,000.Using the incremental annual revenues and expenses, we can calculate the annual net cash flow as follows:Year 1: $80,000 - $50,000 - $10,000 = $20,000Year 2: $75,000 - $45,000 - $10,000 = $20,000Year 3: $70,000 - $40,000 - $10,000 = $20,000Year 4: $65,000 - $35,000 - $10,000 = $20,000Year 5: $60,000 - $30,000 - $10,000 = $20,000Year 6: $55,000 - $25,000 - $10,000 = $20,000Year 7: $50,000 - $20,000 - $10,000 = $20,000Year 8: $45,000 - $15,000 - $10,000 + $23,000 = $43,000We can see that the cumulative cash inflows reach $343,000 in Year 3, so the payback period is 3 years plus the amount of time it takes to recover the remaining portion of the investment, which is:($343,000 - $210,000) / $43,000 = 2.98 yearsTherefore, the closest answer choice is C) 3.2 years.   Payback period = Investment required ÷ Annual net cash inflow= $343,000 ÷ $107,000 per year = 3.2 years

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