Question

In: Accounting

(Ignore income taxes in this problem.) Ursus Inc., is considering a project that would have a...

(Ignore income taxes in this problem.) Ursus Inc., is considering a project that would have a ten-year life and would require a $1,000,000 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:

Sales $2,000,000
Variable Expenses $1,400,000
Contribution Margin $600,000
Fixed Expenses $400,000
Net Operating Income $200,000



All of these items, except for depreciation of $92,500 a year, represent cash flows. The depreciation is included in the fixed expenses.  The company's required rate of return is 12%

a. What is the Payback period?_______________

1. should we accept the project based on Payback period? Yes/No _________

2. Why? __________

b. What is the Net Present Value?_____________

1. should we accept the project based on Net Present Value? Yes/No________

2. Why? __________

c. What is the Internal Rate of Return?_________

1. Should we accept the project based on Internal Rate of Return? Yes/No________

2. Why? ___________

d. What is the Simple Rate of Return?_________

1. Should we accept the project based on Simple Rate of Return? Yes/No_________

2. Why? ___________

Solutions

Expert Solution

Answer to Q-A
Amt (Rs)
Sales 2000000
Less: Variable Cost 1400000
Contribution 600000
Less: Fixed Expense 400000
Net Operating Income 200000
Add: Dep 92500
Cash Inflow 292500
Payback Period Initial Outflow = 1000000
Cash Inflow 292500 3.42
So, Payback Period 3.42 years
Yes we should accept the project
We should accept the project as our investment will give return in just 3.42 years although the life of equipment is 10years.
Answer to Q-B
Net Present Value= Present Value of Inflow- Present Value of Outflow
Present Value of Inflow = DF @12, 10 = 5.65
So, 292500 * DF @12, 10
So, 292500 * 5.65 1652625
Net Present Value= Present Value of Inflow- Present Value of Outflow
NPV= 1652625-1000000
NPV= 652625
Yes the project should be accepted based on NPV
The Projected should be accepted as the NPV is positive
Answer to Q-C
IRR Calculation
Discounting Rate Present Value
DF @12, 10 12% 1652625 (292500*5.65)
DF @28, 10 28% 956158 (292500*3.27)
Using Interpolation x-12 = `1000000-1652625
`28-12 `956158-1652625
x = 27%
Yes
On basis of IRR project should be accepted as IRR is greater than Rate of Return
Answer to Q-D
Simple rate of return is 29.25%
Yes
so it should be accepted as it is greater than rate of return

Related Solutions

(Ignore income taxes in this problem.) Acme, Inc. is considering a project that would have a...
(Ignore income taxes in this problem.) Acme, Inc. is considering a project that would have a ten-year life and would require a $1,275,000 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:             Sales.......................................................... $1,750,650 Less variable expenses.............................. 900,125 Contribution margin.................................. 850,525 Less fixed expenses: Fixed out-of-pocket cash expenses........ $517,100 Depreciation........................................... 119,200     636,300 Net operating income................................ $...
1.        (Ignore income taxes in this problem.) Acme, Inc. is considering a project that would have...
1.        (Ignore income taxes in this problem.) Acme, Inc. is considering a project that would have a ten-year life and would require a $1,275,850 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:             Sales........................................................... $1,750,650 Less variable expenses............................... 900,125 Contribution margin.................................. 850,525 Less fixed expenses: Fixed out-of-pocket cash expenses........ $517,100 Depreciation........................................... 119,200     636,300 Net operating income...................................
Problem 2 (Ignore income taxes in this problem.) Miami Medical Center, Inc., is considering a project...
Problem 2 (Ignore income taxes in this problem.) Miami Medical Center, Inc., is considering a project that would have a ten-year life and would require a $1,200,000 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: Sales $1,700,000 Variable expenses $1,200,000 Contribution margin $500,000 Fixed expenses:    Fixed out-of-pocket cash expenses $200,000    Depreciation $120,000 Net operating...
(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine...
(Ignore income taxes in this problem.) Baldock Inc. is considering the acquisition of a new machine that costs $420,000 and has a useful life of 5 years with no salvage value. The incremental net operating income and incremental net cash flows that would be produced by the machine are: Incremental Net Operating Income Incremental Net Cash Flows Year 1 $61,000 $145,000 Year 2 $67,000 $151,000 Year 3 $78,000 $162,000 Year 4 $41,000 $125,000 Year 5 $83,000 $167,000 Assume cash flows...
Ursus, Inc., is considering a project that would have a ten-year life and would require a...
Ursus, Inc., is considering a project that would have a ten-year life and would require a $4,500,000 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 $ 2,900,000 Variable expenses 1,800,000 Contribution margin 1,100,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 350,000 Depreciation 450,000 800,000 Net operating income $ 300,000 Click here to...
Ursus, Inc., is considering a project that would have a eleven-year life and would require a...
Ursus, Inc., is considering a project that would have a eleven-year life and would require a $1,848,000 investment in equipment. At the end of eleven 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 $ 2,100,000 Variable expenses 1,400,000 Contribution margin 700,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 370,000 Depreciation 168,000 538,000 Net operating income $ 162,000 Click here to...
Ursus, Inc., is considering a project that would have a eleven-year life and would require a...
Ursus, Inc., is considering a project that would have a eleven-year life and would require a $1,848,000 investment in equipment. At the end of eleven 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 $ 2,100,000 Variable expenses 1,400,000 Contribution margin 700,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 370,000 Depreciation 168,000 538,000 Net operating income $ 162,000 Click here to...
Ursus, Inc., is considering a project that would have a eleven-year life and would require a...
Ursus, Inc., is considering a project that would have a eleven-year life and would require a $1,848,000 investment in equipment. At the end of eleven 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 $ 2,100,000 Variable expenses 1,400,000 Contribution margin 700,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 370,000 Depreciation 168,000 538,000 Net operating income $ 162,000 Click here to...
Ursus, Inc., is considering a project that would have a five-year life and would require a...
Ursus, Inc., is considering a project that would have a five-year life and would require a $2,400,000 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.): Sales $ 3,500,000 Variable expenses 2,100,000 Contribution margin 1,400,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 600,000 Depreciation 480,000 1,080,000 Net operating income $ 320,000 Click here to...
Ursus, Inc., is considering a project that would have a ten-year life and would require a...
Ursus, Inc., is considering a project that would have a ten-year life and would require a $1,806,000 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 $ 2,000,000 Variable expenses 1,350,000 Contribution margin 650,000 Fixed expenses: Fixed out-of-pocket cash expenses $ 230,000 Depreciation 180,600 410,600 Net operating income $ 239,400 Click here to...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT