Question

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 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 9%.

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

annual operating cash flow	annual operating income+ depreciation = 168000+162000	330000
Year	Annual operating cash flow	present value of cash flow = cash flow/(1+r)^n r = 9%
0	-1848000	-1848000
1	330000	302752.3
2	330000	277754.4
3	330000	254820.5
4	330000	233780.3
5	330000	214477.4
6	330000	196768.2
7	330000	180521.3
8	330000	165615.9
9	330000	151941.2
10	330000	139395.6
11	330000	127885.8
Net present value	sum of present value of cash flow	397712.9
Year	cash flow
0	-1848000
1	330000
2	330000
3	330000
4	330000
5	330000
6	330000
7	330000
8	330000
9	330000
10	330000
11	330000
IRR = using IRR function In MS excel =irr(-1848000,330000,330000,330000,330000,330000,330000,330000,330000,330000,330000,330000)	13.36%
Payback period = initial investment/annual operating cash flow	1848000/330000	5.6
Average rate of return = average operating income/initial investment	162000/1848000	8.77% = 9%