Question

1.Token, is considering a project that would have a ten-year life and would require a $5,980,000 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				$	4,000,000
Variable expenses					2,350,000
Contribution margin					1,650,000
Fixed expenses:
Fixed out-of-pocket cash expenses	$	500,000
Depreciation		598,000			1,098,000
Net operating income				$	552,000

.

All of the above items, except for depreciation, represent cash flows. The company's required rate of return is 11%.

Required:

a. Compute the project's net present value.

b. Compute the project's internal rate of return.

c. Compute the project's payback period.  

d. Compute the project's simple rate of return.

Answer 1

1	Net Present Value	=	$           7,92,617
2	IRR	=	14.08%
3	Payback period	=	5.20	years
4	Simple rate of return	=	9.23%
	Workings:
1
		Year	Value Flows	Present Factor @ 11%	Present Value
	Initial Cost	0	$       -59,80,000	1	$     -59,80,000
	Cash Inflows ($552000 + $598000)	1 - 10	$         11,50,000	5.88923	$      67,72,617
	Net Present Value				$         7,92,617
2	Computation of IRR
		Year	Value Flows
		0	$       -59,80,000
		1	$         11,50,000
		2	$         11,50,000
		3	$         11,50,000
		4	$         11,50,000
		5	$         11,50,000
		6	$         11,50,000
		7	$         11,50,000
		8	$         11,50,000
		9	$         11,50,000
		10	$         11,50,000
	IRR	=	14.08%
		Formula	=IRR(I15:I20)
3	Payback period	=	initial investment / Annual net cash flows
		=	$5980000 / $1150000
		=	5.20	years
4	Computation of Simple rate of return:
	Simple rate of return	=	Net Profit / Investment
		=	$552000 / $5980000
		=	9.23%