Cardinal Company is considering a project that would require a $2,805,000 invest
ID: 2527443 • Letter: C
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:
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.)
Nothing figuring correctly today. :(
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:
Explanation / Answer
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.)