Question

15 Lamar Company is considering a project that would have an eight-year life and require a $2,700,000 investment in equipment. At the end of 7 years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows: The company's discount rate is 11%. Sales ……………………………………………………………………………………………………………… $3,000,000 Variable expenses ………………………………………………………………………………………… 1,800,000 Contribution margin ……………………………………………………………………………………….. 1,200,000 Fixed expenses Advertising, salaries, and other fixed out-of-pocket costs …. $600,000 Depreciation ………………………………………………………………………….. 355,000 Total fixed expenses ……………………………………………………………………………………. 955,000 Net Operating Income ………………………………………………………………………………….. $245,000

A. Compute the net annual cash inflow from the project. B. Compute the project's net present value . Is the project acceptable? C. Find the project's internal rate of return to the nearest whole percent. D. Comput the project's payback period. E. Compute the project's simple rate of return.

Answer 1

Answer B
Project's Net present value
Year	0	1	2	3	4	5	6	7	NPV
Initial Investment	-$2,700,000
Net annual cash flow		$600,000	$600,000	$600,000	$600,000	$600,000	$600,000	$600,000
Net Cash flow	-$2,700,000	$600,000	$600,000	$600,000	$600,000	$600,000	$600,000	$600,000
Discount Factor @ 11%	1	0.9009009	0.81162243	0.73119138	0.65873097	0.59345133	0.53464084	0.48165841
Present Value	-$2,700,000	$540,541	$486,973	$438,715	$395,239	$356,071	$320,785	$288,995	$127,318
Project's NPV	$127,318
The project is acceptable as it has positive NPV.
Answer C
Internal rate of return (IRR) =	12.45%
Answer D
Project's Payback period = 4 years + ($300000/$600000) = 4.5 years
Answer E
Project's simple rate of return = Net operating Income / Initial Investment = $245000 / $2700000 = 9.07%