Ostermeyer Corporation is considering a project that would require an initial investment of $247,000 and would last for 7 years. The incremental annual revenues and expenses for each of the 7 years would be as follows (Ignore income taxes.): Sales $198,000 Variable expenses 46,000 Contribution margin 152,000 Fixed expenses: Salaries$22,000 Rents 32,000 Depreciation 33,000 Total fixed expenses 87,000 Net operating income $ 65,000 At the end of the project, the scrap value of the project's assets would be $16,000.Required:Determine the payback period of the project.
What will be an ideal response?
| Net operating income | $ | 65,000 |
| Add noncash deduction for depreciation | 33,000 | |
| Annual net cash inflow | $ | 98,000 |
Payback period = Investment required ÷ Annual net cash inflow
= $247,000 ÷ $98,000 = 2.52 years
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