Student Name Acc 374 Fall 2012 Section 234 6 Points Ignore I

student Nameacc374 Fall 2012section 234 6 Points Ignore Income

Rogers Company is studying a project with a ten-year life, requiring a $660,000 investment in equipment that has no salvage value. The project provides net operating income as follows:

  • Sales: $500,000
  • Cash variable expenses: $200,000
  • Contribution margin: $300,000
  • Fixed expenses: $200,000 (cash expenses), $80,000 (depreciation)

Net operating income: $20,000 annually. The company's required rate of return is 8%. Calculate the payback period for this project, showing all calculations and rounding to two decimal places.

Paper For Above instruction

The analysis of the Rogers Company's project to determine its payback period involves understanding how quickly the initial investment can be recovered through the project's net cash flows. The payback period is significant for assessing the liquidity risk and capital recovery timing of potential investments. Given the net operating income and the required investment, we can proceed with the calculations.

First, acknowledge that the initial investment is $660,000, and the project generates an annual net operating income of $20,000. Since depreciation is a non-cash expense, it does not affect cash flows directly. Therefore, to calculate the payback period, we consider the project's annual net cash inflow, which in this case, can be approximated by net operating income plus depreciation (because depreciation is a non-cash charge).

Annual cash flow = Net operating income + Depreciation = $20,000 + $80,000 = $100,000

Next, calculate the payback period as initial investment divided by annual cash flow:

Payback period = $660,000 / $100,000 = 6.6 years

Thus, the project would recover its initial cost in approximately 6.60 years.

In conclusion, with a payback period of 6.60 years, the project meets the company's capital recovery timeline, assuming that the cash flows are consistent throughout the project life. This analysis helps in decision-making, indicating that the investment will be recouped within a reasonable period relative to the project duration.

References

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