Jarvey Company Is Studying a Project That Would Have a Ten-Year

question 169

Multiple Choice

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:
$\begin{array}{|l|r|r|}\hline \text { Sales } & & \$ 500,000 \\\hline \text { Less cash variable expense } & & 200,000 \\\hline \text { Contribution margin } & & 300,000 \\\hline \text { Less fixed expenses: } & & \\\hline \text { Fixed cash expenses } &\$ 150,000 \\\hline \text { Depreciation expenses } &\underline{45,000} & 195,000 \\\hline\end{array}$
$$\begin{array} { | l | l | l |} \hline\text { Net incorne } & & \$ 105,000 \\\hline\end{array}$$
The company's required rate of return is 12%.What is the payback period for this project? (Ignore income taxes in this problem.)

• A) 2.00 years.
• B) 3.00 years.
• C) 4.28 years.
• D) 9.00 years.

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Definitions:

Cumulative Dividends

Dividends that are owed and accumulate if not paid in a given period, typically associated with preferred shares.

Common Stock

A type of security that represents ownership in a corporation, with holders having a claim on the company's assets and earnings.

Preemptive Right

The right of existing shareholders to purchase additional shares before the company offers them to the public, maintaining their proportional ownership.

Common Shareholder

A common shareholder is an individual or institution that owns common shares in a company, giving them rights to vote at shareholder meetings and to receive dividends.