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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