Cardinal Company is considering a five-year project that would require a $2,975,000 investment in equipment with a useful life of five years and no salvage value. The company's discount rate is 14%. The project would provide net operating income in each of five years as follows:

Required:

Assume a post-audit showed that all estimates (including total sales) were exactly correct except for the variable expense ratio, which actually turned out to be 45%. What was the project's actual payback period?

Transcribed Image Text:

$2,735,000 Sales.... Variable expenses. . Contribution margin. Fixed expenses: Advertising, salaries, and other out-of- pocket costs ... 1,000,000 1,735,000 $735,000 595,000 .... .. Depreciation..... Total fixed expenses... Operating income.... 1,330,000 $ 405,000