(Ignore income taxes in this problem.) Rogers Company is studying a project that

Question

(Ignore income taxes in this problem.) Rogers Company is studying a project that would have a ten-year life and would require an $1,700,000 investment in equipment which has no salvage value. The project would provide net operating income each year as follows for the life of the project:

167,000

116,000

496,000

$287,000

The company's required rate of return is 8%. What is the payback period for this project?

  Sales $950,000   Less cash variable expenses

167,000

  Contribution margin 783,000   Less fixed expenses:   Fixed cash expenses $380,000   Depreciation expenses

116,000

496,000

  Net operating income

$287,000

Explanation / Answer

Calculation of payback period for the project:

  Sales

$          950,000

  Less: Cash variable expenses

$       (167,000)

  Less: Fixed cash expenses

$       (380,000)

Net Annual Cash Inflow

$          403,000

Initial Investment

$      1,700,000

Payback Period = Initial Investment / Annual Cash inflows

Payback Period = 1700000 / 287000 =

                    4.22

Years

Calculation of payback period for the project:

  Sales

$          950,000

  Less: Cash variable expenses

$       (167,000)

  Less: Fixed cash expenses

$       (380,000)

Net Annual Cash Inflow

$          403,000

Initial Investment

$      1,700,000

Payback Period = Initial Investment / Annual Cash inflows

Payback Period = 1700000 / 287000 =

                    4.22

Years

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