Question

Ursus, Inc., is considering a project that would have a ten-year life and would require a $3,330,000 investment in equipment. At the end of ten 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.): Sales $ 2,800,000 Variable expenses 1,750,000 Contribution margin 1,050,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 310,000 Depreciation 333,000 643,000 Net operating income $ 407,000 Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 14%. Required: a. Compute the project's net present value. (Round your intermediate calculations and final answer to the nearest whole dollar amount.) b. Compute the project's internal rate of return. (Round your final answer to the nearest whole percent.) c. Compute the project's payback period. (Round your answer to 2 decimal place.) d. Compute the project's simple rate of return. (Round your final answer to the nearest whole percent.)

Answer 1

Answer:

initial investment = $3,330,000

net cash flow per year (10 years) = total sales - variable costs - fixed costs (except depreciation) = $2,800,000 - $1,750,000 - $310,000 = $740,000

discount rate = 14%

A) using an excel spreadsheet we can calculate project's NPV = $529,926

or we can do it manually:

using the annuity table, the present value of the cash flows = $740,000 x 5.2161 = $3,859,914

NPV = $3,859,914 - $3,330,000 = $529,914

B) project's IRR = 17.96%

C) the project's payback period = initial investment / net cash flow = $3,330,000 / $740,000 = 4.5 years

D) the accounting simple rate of return per year:

net income = net cash flow - depreciation expense = $740,000 - $333,000 = $407,000

year          net income             investment           rate of return

1                 $407,000              $3,330,000                12.22%

2                $407,000              $2,997,000                13.58%

3                $407,000              $2,664,000                15.28%

4                $407,000               $2,331,000                17.46%

5                $407,000               $1,998,000                20.37%

6                $407,000               $1,665,000                24.44%

7                $407,000               $1,332,000                 30.56%

8                $407,000                $999,000                 40.74%

9                $407,000                $666,000                 61.11%

10              $407,000                 $333,000               122.22%