(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:

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:

Quizplus · Accepted Answer

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 = $20,000
Year 2: $75,000 - $45,000 - $10,000 = $20,000
Year 3: $70,000 - $40,000 - $10,000 = $20,000
Year 4: $65,000 - $35,000 - $10,000 = $20,000
Year 5: $60,000 - $30,000 - $10,000 = $20,000
Year 6: $55,000 - $25,000 - $10,000 = $20,000
Year 7: $50,000 - $20,000 - $10,000 = $20,000
Year 8: $45,000 - $15,000 - $10,000 + $23,000 = $43,000

We 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 years

Therefore, the closest answer choice is C) 3.2 years. 11ea7998_5c36_da92_911b_01483a662e41_TB2627_00_TB2627_00 Payback period = Investment required ÷ Annual net cash inflow
= $343,000 ÷ $107,000 per year = 3.2 years

(Ignore Income Taxes in This Problem