Determining the payback for project


As the head of Human Resources at Harris Light & Magic Corporation, Renée is determined to increase the wealth of the company. She was approached by Segler Executive Management Retreats, Inc-a company specializing in executive training. Segler is offering, for an upfront payment of $75,000, to design an executive program for Harris' 15 managers. Once the program is designed, the company's 15 managers will be scheduled to fly to a retreat in Bermuda to acquire expert knowledge in productivity. It is expected that the program will improve the company's Magic Division revenues by 1%, or $500,000, each year for five years. However, with all this focus on expanding the Magic revenues, Renée expects the Light Division's sales to decline by 0.75%, or $175,000, each year. After five years, the acquired knowledge would be obsolete and the revenues for the two product lines would return to previous levels. Renée also believes that a retreat of this nature would reduce Harris' manager turnover by 1 manager each year. When a manager does not turnover, Renée does not have to run ads at a cost of $4,500 each instance. The cost of flying each manager first-class to the retreat is expected to be $1,500 round trip. Lodging, meals, and incidental expenses are expected to cost $600 per manager per day for the seven day retreat. The company has a tax rate is 31%. Its depreciation method is straight-line. The company paid a dividend to shareholders of $1 per share last year and is expect to do the same over the next five years. Harris Light & Magic Corporation is traded on the New York Stock Exchange and currently has 100,000 outstanding shares, owned by 17,546 shareholders. Variable costs for the Magic and Light divisions are 65% and 30% of sales revenue, respectively. What is the payback for this project?

A. 2.73

B. 2.82

C. 3.05

D. 3.21

E. 3.26

F. 4.08

G. 5.2

H. does not payback

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Finance Basics: Determining the payback for project
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