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

Business

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