Question

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 view Exhibit 12B-1 and Exhibit 12B-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 places.)

d. Compute the project's simple rate of return. (Round your final answer to the nearest whole percent.)

Answer 1

a.	Net Present Value	=	$     3,84,720
b.	IRR	=	19%
c.	Pay back period	=	4.30
d.	Simple rate of return	=	13%
	Workings:
a.
		Year	Value Flows	Present Factor @14%	Present Value
	Initial Cost	0	$ -18,06,000	1	$     -18,06,000
	Cash Inflows ($180600 + $239400)	1 - 10	$     4,20,000	5.216	$      21,90,720
	Net Present Value				$         3,84,720
b.	Computation of IRR
		Year	Value Flows
		0	$ -18,06,000
		1	$     4,20,000
		2	$     4,20,000
		3	$     4,20,000
		4	$     4,20,000
		5	$     4,20,000
		6	$     4,20,000
		7	$     4,20,000
		8	$     4,20,000
		9	$     4,20,000
		10	$     4,20,000
	IRR	=	19%
c.	Computation of Pay Back Period:
	Pay Back Period	=	Initial Investment / Annual Cash Flow
		=	$1806000 / $420000
		=	4.30	years
d.	Computation of Simple rate of return:
	Simple rate of return	=	Net Profit / Investment
		=	$239400 / $1806000
		=	13%