The management of Truelove Corporation is considering a project that would require an initial investment of $321,000 and would last for 7 years. The annual net operating income from the project would be $82,000, including depreciation of $42,000. At the end of the project, the scrap value of the project's assets would be $27,000. (Ignore income taxes.) Required:
1. Determine the payback period of the project.2. What will be an ideal response?

2.6 years

The appropriate response to carry out the project if the payback period is within the acceptable payback period of the company

Explanation:

Payback period calculates the amount of the time it takes to recover the amount invested in a project from its cumulative cash flows.

Payback period = amount invested / cash flow

Cash flows is used in calculating the payback period.

To derive the payback period from net income, add depreciation to net income

$82,000 + $42,000 = $124,000

$321,000 / $124,000 = 2.6 years

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