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:

Instalment Payment

A method of payment whereby the total cost of a purchase is divided into smaller amounts, to be paid over a specified period of time.

Loan

Borrowed money that is expected to be paid back with interest over a set period of time.

Non-Current Liability

Long-term financial obligations listed on a company's balance sheet, not due within one year.

Deferred Revenue

Income received by a company for goods or services yet to be delivered or performed.