Harrison Corporation is studying a project that would have an eight-year life an

Question

Harrison Corporation is studying a project that would have an eight-year life and would require a $300,000 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:

The company's required rate of return is 10%. The payback period for this project is closest to:

Sales $500,000 Less cash variable expenses 200,000 Contribution margin 300,000 Less fixed expenses:   Fixed cash expenses $150,000   Depreciation expenses   37,500 187,500 Net operating income $112,500

Explanation / Answer

Payback period = Investment required / Annual net cash inflow

Payback period = $300,000 / $150,000 per year = 2 years

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