# Jarvey Company is studying a project that would have a ten-year life and would require a $450,000...

## Question:

Jarvey Company is studying a project that would have a ten-year life and would require a $450,000 investment in equipment that has no salvage value. The project would provide net income each year as follows for the life of the project:

Sales | $500,000 | |

Less cash variable expenses | 200,000 | |

Contribution margin | 300,000 | |

Less fixed expenses: | ||

Fixed cash expenses | $150,000 | |

Depreciation expenses | 45,000 | 195,000 |

Net income | $105,000 |

The company's required rate of return is 12%. What is the payback period for this project?

A) 2 years

B) 3 years

C) 4.28 years

D) 9 years

## Payback Period:

The payback period is the time period expressed in a number of years that investment takes to recover its initial cost using its annual cash inflows from the investment. The payback period is a capital budgeting technique that doesn't use the time value of money and requires the investment with the lowest payback period to be selected.

## Answer and Explanation: 1

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*The payback period of the project is B. 3 years*

Explanation:

As per the data provided by Jarvey Company:

- Initial investment cost = $450,000
- Net...

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Chapter 5 / Lesson 24Learn the meaning and purpose of the payback period method. Learn how to calculate the payback period, and understand the advantages and limitations of using this method.

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