Flamingo Corporation is considering a project that would require an initial inve

Question

Flamingo Corporation is considering a project that would require an initial investment of $210,000 and would last for 6 years. The incremental annual revenues and expenses for each of the 6 years would be as follows: Sales $203,000 Variable expenses 45,000 Contribution margin 158,000 Fixed expenses: Salaries $24,000 Rents 37,000 Depreciation 31,000 Total fixed expenses 92,000 Net operating income $66,000 At the end of the project, the scrap value of the project's assets would be $24,000. Determine the payback period of the project.

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Explanation / Answer

Calculate payback period :

Payback period = Initial investment/annual cash flow

Annual cash flow = 66000+31000 = 97000

Payback period = 210000/97000 = 2.16 years

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