In: Accounting
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 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.)
1 | Year | Cash Flow | PVF@ 14% | Discounted Cash flow | ||
0 | -2,400,000 | 1.0000 | -2,400,000 | |||
1 | 800,000 | 0.8772 | 701,754 | |||
2 | 800,000 | 0.7695 | 615,574 | |||
3 | 800,000 | 0.6750 | 539,977 | |||
4 | 800,000 | 0.5921 | 473,664 | |||
5 | 800,000 | 0.5194 | 415,495 | |||
NPV | 346,465 | |||||
2 | Year | Cash Flow | PVF@ 14% | Discounted Cash flow | PVF@ 20% | Discounted Cash flow |
0 | -2,400,000 | 1.0000 | -2,400,000 | 1.0000 | -2400000 | |
1 | 800,000 | 0.8772 | 701,754 | 0.8333 | 666667 | |
2 | 800,000 | 0.7695 | 615,574 | 0.6944 | 555556 | |
3 | 800,000 | 0.6750 | 539,977 | 0.5787 | 462963 | |
4 | 800,000 | 0.5921 | 473,664 | 0.4823 | 385802 | |
5 | 800,000 | 0.5194 | 415,495 | 0.4019 | 321502 | |
NPV | 346,465 | -7510 | ||||
IRR is approximatly 20% | ||||||
3 | Initial Investment / Cash flow Per Period | |||||
2400000 / 800000 | 3 | Years | ||||
4 | Simple rate of return = Net operating income ÷ Initial investment | |||||
320000 / 2400000 | 13.33 | % | ||||