Question
In: Accounting
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 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.)
Solutions
Expert Solution
|
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% |
ekkarill92 answered 1 year agoRelated Solutions
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Variable expenses
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Contribution margin
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Contribution margin
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