Question

Ursus, Inc., is considering a project that would have a five-year life and would require a $1,650,000 investment in equipment. At the end of five years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows (Ignore income taxes.):

Answer 1

Answer:

Annual cash flows = $300,000 ($200,000 + $100,000)  

Length = 10 years  

Required rate of return = 12%  

NPV = $695,066.91  

IRR = 27.3%  

Payback period = 1,000,000/300,000 = 3.33 years  

Simple rate of return = $200,000/1,000,000 = 20%

Explanation: