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.): 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

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.):  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

Quizplus · Accepted Answer

To calculate the payback period, we need to determine the point at which the cumulative cash inflows equal the initial investment.

Year 1: $80,000 - $118,000 = -$38,000 
Year 2: $90,000 - $110,000 = -$20,000 
Year 3: $100,000 - $102,000 = -$2,000 
Year 4: $110,000 - $85,000 = $25,000 
Year 5: $120,000 - $85,000 = $35,000 
Year 6: $130,000 - $85,000 = $45,000 
Year 7: $140,000 - $85,000 = $55,000 
Year 8: $150,000 - $85,000 - $23,000 = $42,000

Based on these calculations, it takes until Year 3 for the cumulative cash inflows to exceed the initial investment of $343,000. Therefore, the payback period is approximately 3.2 years.

The best choice is C.

Olinick Corporation Is Considering a Project That Would Require an Investment