JUST NEED ANSWER . ASAP (Ignore income taxes in this problem.) Neighbors Corpora

Question

JUST NEED ANSWER .

ASAP

(Ignore income taxes in this problem.) Neighbors Corporation is considering a project that would require an investment of $304,000 and would last for 8 years. The incremental annual revenues and expenses generated by the project during those 8 years would be as follows: Sales $220,000 Variable expenses 23,000 Contribution margin 197,000 Fixed expenses: Salaries 30,000 Rents 43,000 Depreciation 38,000 Total fixed expenses 111,000 Net operating income $86,000 The scrap value of the project's assets at the end of the project would be $20,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to: 2.5 years 3.5 years 3.0 years 2.4 years

Explanation / Answer

Cash flows each year except the last year is as follows:

= Contribution - Salaries - Rent

(Depreciation is a non cash expense and scrap value has no role to play in calculation of payback period as payback period is the period in which initial investment is recovered)

= $ 197,000 - $ 30,000 - $ 43,000

= $ 124,000 per annum

Payback period in cash of equal cash flows

= Initial investment/Cash flow per period

= $ 304,000/$ 124,000

= 2.45 years

So, the answer is closest to 2.40 years. So, option D is the correct option.

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